Following the pension changes introduced in 2015, thousands of retirees have chosen to use income drawdown to access their pension funds.
To summarise, income drawdown (or Flexi-Access Drawdown as it is now known), is the method of withdrawing income payments or lump sums from your pension, whilst keeping your fund invested for the long term. Prior to the changes in 2015, the main method of providing a retirement income from your pension plan would have been to purchase an annuity, a much less flexible option but offering a guaranteed income payable for life. The option to draw a fund flexibly prior to the rule changes in 2015 was restricted; a) you needed a large pension fund and b) you needed to seek advice to access drawdown products. The new rules swept away these restrictions, meaning that there are more options for all, however, care is required. The difference is that the new rules place the responsibility on the individual and it is easy to make strategic mistakes.
According to a study carried out by the Financial Conduct Authority published in 2018, since 2015 over 1.8 million pension plans have been accessed for the first time on a flexible basis, whether this is using income drawdown or choosing to withdraw the whole fund as a cash lump sum. The figures have slowed over the years, dropping from 415,000 pension pots in 2015 to around 270,000 in 2017-2018, but drawdown remains a popular choice, especially when wanting to take a tax- free lump sum without a regular income payment.
We would all agree that being able to take a flexible income in retirement is great, as we are generally living longer and are likely to have different working lives to our parents and grandparents.
Flexible pensions allow us to ease into retirement, maybe helping us to change career later in life or help support our families by providing capital for property purchases or for care. The important point here is longevity. As we live longer, the time we spend in retirement will increase, which means that the money we have saved needs to last.
While we like to think that we are optimistic about our longevity, the fact is that we are pessimistic – most people think that they will pass away earlier than they do. Figures published by the Office for National Statistics state that a man aged 65 in 2015 could expect to live, on average, a further 18 years, taking him to 83 years of age. This means that pension funds need to last longer than ever.
Information in a survey conducted by the insurance company Zurich , confirmed that retirees entering drawdown spend relatively little time planning for their retirement. Just a third of people surveyed calculated how much income they would be able to take from their pensions at retirement, a third thought about how much money they would need to live on in retirement and a third thought about how long their money might need to last. More importantly this survey highlighted that just 16% of retirees decided how they would invest their funds once in drawdown to achieve the income that they need or the best way to achieve this in a tax efficient way. Also, most people opted to take their pensions with the provider they had saved with, ignoring any of the other options available in the market place.
With this back-drop, it is vital that steps are taken to identify how much you can afford to take from your retirement pot and, more importantly, to avoid withdrawing too much too soon. It is also important to think about the consequences of your chosen retirement income on those who will inherit your wealth when you pass away. Just one in five retirees feel that their partner has the financial understanding to cope with the ongoing management of their investments once they are gone. The engagement of your loved one in the process is as important as how you decide to invest and access your pension savings. They need to understand the process so that they can continue with the plans you have made. If this is not the case, this can cause worry and confusion in the future.
The good news is that there are things you can do to prepare before choosing to access your pension pot via drawdown
Using the RETIRE checklist can help you think about the basics before moving forward:
Research: Shop around to find the most suitable drawdown provider for your needs, you do not have to take your pension with the provider you have saved with.
Expenditure: Calculate your living costs, consider how much you need to live on now, in retirement and later in life. Most people find they spend less as they age, ignoring potential care costs.
Time: Consider how long you might live and so how long your pension pot needs to last. How long your parents lived for is a good indication of your potential longevity. Do not under-estimate how long this might be.
Income: Calculate how much income you can afford to safely withdraw from your pot. Think about what you need, what you would like ideally and where you can compromise if needs be.
Risk: Think about what you will invest in – with risk comes the potential for greater returns but also greater potential for loss.
Engage: Speak to a financial adviser or seek free guidance which is available via the Pension Wise or Money & Pension Service websites.
Churchgates offer a team of financial advisers provide independent advice, so they are not restricted or tied to any product provider. A free initial meeting could help you decide whether we can offer you what you need for your strategic retirement planning.
Take a look at churchgates.co.uk or contact Robin Jackson or Matthew Boardman if you would like to find out more.