How to make long term saving and investing work harder for you

After years spent building up your pension fund, when the time comes to turn it into a regular income, it’s important to know all the options.

If you’ve decided to take a tax-free lump sum, how do you best use the rest of your pension to provide a retirement income?

Guaranteed Income

One option is to exchange part or all your private pension pot for a guaranteed taxable income for the rest of your life, known as an ‘Annuity’. The amount of income you receive will depend on many factors, including interest rates, whether you smoke, previous occupations and even your postcode, so it’s important to shop around.    

If you have any health issues, no matter how minor, it’s important to let the Annuity provider know as this can increase the level of income you receive.

There are lots of ways you can tailor your annuity to suit your circumstances. You can choose to guarantee your income will continue to pay after your death to your spouse or dependant for the rest of their life. You can also opt to have your income increase each year at a given rate or by inflation, to help protect its buying power.  

NFU Mutual Financial Advisers can advise you on the options available and help you select the right ones for you; they can also help you shop around using our panel of Annuity providers.    

Leave your pension fund invested and take a regular Income

One of the most popular ways to take an income from a private pension is by moving some or all your pension pot into ‘Pension drawdown’. With this option, your pension pot remains invested, and you can withdraw a regular taxable income which you can increase or decrease to suit your circumstances, you can also withdraw ad hoc lump sums.

The retirement income you receive from Pension drawdown is not guaranteed. Although your pension pot remains invested and has the potential to grow, there is also the risk that if you take too much income, your investments don’t perform, or you live longer than expected you could exhaust your pension pot and run out of money.

If you’re still working or plan to in the future, it’s important to know that if you take income from ‘Pension drawdown’ this will limit the amount you and your employer can pay into your pension to £10,000 each tax year.

If you opt for Pension drawdown it’s important to review on a regular basis to make sure your investments remain on track to meet your income needs.     

Take regular lump sums

You can choose to treat your pension pot as a series of ‘mini pensions’. If you haven’t withdrawn a tax-free lump sum, this option allows you to take each one as a lump sum, with 25% of each payment normally paid tax-free. You can choose how often you cash in and the size of each mini pension.    

‘Mix and match’

Depending on your circumstances it can make sense to take a ‘mix and match’ approach when it comes to taking a regular income from your pension.

Those that need a minimum level of guaranteed income to meet their regular bills may choose to use part of their fund to purchase an Annuity, while leaving the remainder of their fund invested from which they can take a variable income, which they can increase, decrease, stop or start to suit their circumstances.

Similarly, those who plan to gradually reduce the hours they work as part of a phased retirement, often opt to go into Pension drawdown, initially taking small amounts of income which gradually increases as their salary reduces. This allows them to delay any potential Annuity purchase to a time when interest rates may be higher, or they suffer a health issue which may allow them to secure a higher income.

Your NFU Mutual Financial Adviser can explain all the options and help you with retirement planning in a way that’s right for you.

What's next?

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