We will all have read about the new rules relating to pensions that were announced by the Chancellor in his recent Budget, rules that will mean that from April next year people reaching retirement will no longer be compelled to buy an annuity with the money that has accumulated in their pension pot. Instead, they will have the ability, or option, to access their own pension funds as rapidly and as frequently as they like.
Annuities, the traditional form of purchase with pension fund monies, have received a great deal of negative press recently. When you buy an annuity you hand over the funds in your pension fund to an insurance company and in return they ‘guarantee’ you an income each year for the remainder of your life. While the money you hand over is protected and is 100% safe, this is effectively a ‘bet’ with the insurance company – the ‘bet’ being that you live long enough to see your capital returned. And with annuity rates falling over recent years, this ‘bet’ has moved more and more in favour of the insurance companies themselves.
So what do you do when you approach retirement?
Well, the first thing to do is to look at your overall financial situation and give this a complete overhaul. Look at your current income and also your outgoings and from this assess how much money you need to cover your basic living expenses. By this we mean your accommodation costs, food, heat and lighting, car running costs and other day to day essentials.
So, let’s say that you do the above calculation and you find that your ‘basic’ living costs amount to £250 per week – that’s a total of £13,000 per annum. If you are not due to retire until April 2016 or beyond, then you will be entitled to receive the new single tier pension, which is being introduced from that date and is expected to be around £155 per week – or just over £,8,000 per annum. This leaves you with a basic income needs shortfall of £5,000 per annum which you will need to cover.
This is where the benefits of having control over your own ‘pension’ pot can come into play. For example, you may say, well I need to buy an annuity to cover my basic income shortfall – in this case £5,000 per annum – and budget accordingly. Any surplus funds in your pension pot can then be used by you however you want – to pay off your mortgage if you have one, to ‘gift’ to your children, or just to fund your lifestyle.
Alternatively, you may say I don’t want to use a large part of the ‘capital’ I have built up in my pension in this way and you may decide to invest this money, drawing the £5,000 income shortfall from this pot each year. You will have far more control over your money, but you will also have far more responsibility for it – if you make a poor investment decision, or spend too much, you may find this pot diminishes more quickly that you were expecting.
So what do I do?
Well, if you find yourself approaching ‘retirement’ it is essential that you take financial advice about your situation. There are plenty of financial advisors out there who can help you in your decision making – just go online and you will find plenty near you – but do make sure that they offer ‘independent’ advice.