It doesn’t have to be a pension annuity
Some say pension annuities are perceived to be poor value with little or no flexibility, and that buying an annuity is no longer the default option when approaching retirement. Where once retirees sought only guarantees and security, flexibility is increasingly important for some.
In theory, the option to defer purchasing an annuity until some point in the future appears attractive in the hope that annuity rates may rise. In reality, it is unlikely that rates will increase significantly in the long term unless we see a longer-term shift towards higher interest rates.
With the introduction of the alternative secured pension, which is available at age 75, the compulsion to purchase an annuity has been removed. There are circumstances where annuity deferral is advantageous: the loss of a spouse may remove the need to include spouse’s benefits; poor health in retirement may mean the qualification for an impaired or enhanced annuity; or a change in attitude towards investment risk.
The real benefits with an unsecured pension lie in being able to structure and change an income throughout retirement. The pension fund is invested in a similar way to a personal pension, with the investor having the option to draw, within certain limits, an income from the fund. It’s also possible now to defer drawing any income but still take the tax-free cash at outset.
This provides greater flexibility when it comes to stepping down to retirement, but it can also be a useful tool in minimising income tax. Retirement planning should not be viewed in isolation, however: in many circumstances income drawdown used in tandem with a specific investment planning strategy can be an effective income tax reducer.
