Key Steps

Six key steps you can take to get yourself a better retirement income.

Step 1. Be prepared to take advice

Read the relevant Financial Services Authority (FSA) publications, take a look at the Pensions Advisory Service (TPAS) website, and read up on any other unbiased guidance you can find.

If you are not sure how to evaluate the various annuity options available to you, take advice from someone who does know.

Consider whether you might qualify for an impaired life annuity or an enhanced annuity. Increased annuity rates might apply if you have any lifestyle issues or medical conditions, or if you are a regular smoker.

If you are considering taking an alternative route other than an annuity, such as income drawdown, your need for advice is likely to be greater.

If your pension savings represent the lion’s share of your income in retirement, the choices you make will be critical. Once you make your decision, you may not be able to change your mind.

How is your pension fund invested? Many people’s funds have been badly affected in the recent stockmarket turmoil. Take advice; check that your pension pot can be used to the greatest effect, and don’t be caught out.

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Step 2. Clarify in your own mind your needs for income in retirement

Think about what you need to live on now, and what you might need to live on in the future, say in 5, 10, 15 or 20 years’ time.

Do you have any other sources of income? What part might they play in your retirement?

What about the needs of your partner and anyone else who is dependent on you? How might this effect your income requirements in retirement? Might a joint life annuity be appropriate?

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Step 3. Do you need all your tax-free cash?

Could some of it be utilised better to buy extra income in retirement?

Find out how much tax-free cash you are entitled to.

Work out how much of the lump sum is available for investment, after deducting amounts that are actually needed for other important purposes, such as paying off debts.

Find out how much extra retirement income you could get if that remaining lump sum were used to buy an annuity.

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Step 4. What about your appetite for risk

Are you willing to put some of your pension savings at risk in the hope of achieving a higher income in the future, such as in an income drawdown plan?

What is the minimum level of income you will need to meet essential expenses?

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Step 5. Create yourself a retirement income plan

Decide on the strategy you will follow (for example, buying an annuity, income drawdown, phased drawdown) and the investment approach you will take with any assets that are not used to buy an annuity.

Work out how much income you will be able to generate from your retirement income plan. If it is not enough, you might have to reconsider your plan. Maybe you don’t need to spend your tax-free lump sum immediately. Perhaps it can be used to generate a bigger income.

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Step 6. Make sure you shop around for the best deal

If you are going to buy an annuity, then shop around. Use the open market option; it allows to you to move your pension fund to another provider offering better annuity rates. Your current pension provider may not offer the best annuity rates and you cannot change providers after purchase.

Retirement brings with it many welcome distractions – not working, holidays, a new car, that sort of thing – but you must remember to give your pension arrangements plenty of time and thought too. Doing this well in advance of retirement is important.

Making the wrong decision about your retirement planning and buying an annuity can be financially disastrous. Mistakes made at this important time are often impossible to correct and even ‘safe’ choices can present problems if things do not go to plan.