I have built up a pension fund during my working life which is now worth around £ 250,000. I am planning to retire next year and have started to think about how much income my pension will provide me. I understand from my financial advisor that the best route to income is to dip directly into my invested fund, but I am nervous about doing this in case the investments lose value and I don’t. enough. Can I use my fund to get a guaranteed amount each month?
Phil Beck of Smith & Pinching responds:
When you retire, there are two main ways you can generate retirement income: Flexi Access Draw (FAD) and annuity. The route suggested by your advisor is the FAD. This means leaving your pension invested and withdrawing what you need from it as and when you need it. This is the most popular route these days because it gives you the option of earning regular income or different income levels at different stages of your life. ADF may be able to generate higher income than an annuity, but this is not guaranteed, and large withdrawals may in fact be disadvantageous in terms of tax and fund erosion.
Under the ADF, your pension portfolio remains subject to market fluctuations and its value may go down as well as up. This has revenue implications. You may choose to take a more conservative approach to investing, thereby reducing your exposure to risk, but this may not be an appropriate long-term strategy. It is therefore essential to monitor pension investments throughout your retirement.
Annuities are what people expected from a pension: they provide guaranteed income for life. An annuity is a plan that you take out with a provident fund for a lump sum. Buying an annuity is usually an irrevocable decision (although some premature death provisions can be built in) and you set the income levels upfront. You can build in inflation protection, but you cannot choose, for example, to take higher income levels while you are fit and healthy (thus able to enjoy more vacations etc. ) and lower income later when your expenses can be reduced.
Annuities are right for some people and one may be right for you – if you are not comfortable with the risk of investing. It is possible to use both an annuity and an ADF.
The time leading up to retirement is critical and I strongly recommend that you take independent financial advice at this point to ensure you are making the right choices at this important time.
The opinions expressed in this article do not constitute advice. The value of an investment and the income from it can go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than what you initially invested.
For more information please visit www.smith-pinching.co.uk