How to get the best from your pension in retirement

A dilemma faced by many approaching or in retirement is how to generate the income they need from their pension, while also giving it the potential to grow. Having a good understanding of the options and how they can be combined can help you get the best from your pension.      

What are the options?

Annuities

The traditional approach to taking money from a pension is to take a tax-free lump sum, before handing the rest over to an insurance company in exchange for a guaranteed income payable for the rest of your life, known as a Lifetime Annuity.

You can choose to build in other benefits when you buy, these include:

• An annual increase in the income you receive, at a set percentage or linked to inflation.
• A guarantee that in the event of your death, the income will continue to be paid to your spouse for the rest of their life, at the same or a reduced level.
• 100% Capital Protection, which means that in the event of your death, the difference between the amount you paid for your annuity less the payments you’ve received will be repaid to your family.          

When buying an Annuity, it’s important to shop around or ask your NFU Mutual Financial Adviser to do it for you, as Annuity rates can differ significantly between providers. It’s also vital to let the provider know if you have any health conditions, as this can result in a higher level of income through an Enhanced Annuity.

One drawback of a Lifetime Annuity is that you cannot normally change your mind once you’ve bought it. One alternative is a Fixed Term Annuity which can provide a guaranteed income for a set period, normally between 3 and 20 years, at the end of which you decide whether to buy a different type of Annuity or take a variable income or lump sum from the amount returned to you.   

Income Drawdown

One of the most popular ways to take an income from a pension is through ‘Income Drawdown’. This allows you to leave your money invested and vary the amount of income you take to suit your circumstances. Because the money remains invested, it has the potential to grow, but it can also fall in value and there’s the risk that you may exhaust the pot and run out of money later in life.     

Combining Drawdown and an Annuity

If you need the security of a guaranteed level of income you could choose to use part of your fund to buy a Fixed Term or Lifetime Annuity, while leaving the remainder invested in Income Drawdown. You can then use your Income Drawdown pot to provide an additional income that you can increase, decrease, stop or start to suit your circumstances. This also gives you the potential to benefit from any future growth on your Income Drawdown funds.  

Income Drawdown first and an Annuity in later life 

Many people gradually reduce the hours they work as part of a phased retirement and opt to go into Income Drawdown, initially taking small amounts of income which gradually increases as their salary or profits from work reduces.

This approach allows you to delay any potential Annuity purchase to a time when interest rates may be higher, or you suffer a health issue which may allow you to secure a higher income through an ‘Enhanced Annuity.'

Fixed Term Annuity until state pension age

A Fixed Term Annuity can be particularly useful if you need a guaranteed level of income for a specified period. This may be the case if you’re retiring before state pension age and need a "bridge" of guaranteed income until your state pension kicks in.

Once you reach the end of your fixed term, you have the full range of pension income choices available to you once again.

What's next?

You can give us a call on:

0800 622 323

A member of the team will be able to support you in arranging an appointment with an NFU Mutual Financial Adviser to discuss your individual needs.