Question: What would be the most preferred and suitable method to draw my retirement benefits?

Answer: Retirement today is seen as a time of opportunity. If you have built up assets in your pension fund, whether through membership of your employer’s pension scheme or through personal contributions to a pension plan, the range of options as you move into retirement has never been wider.

Due to different circumstances faced by each family, everyone should consider the alternatives to maximise the type of benefit they receive.

For many retirees an annuity will often be the most preferred and suitable method to draw their retirement benefits.

However, in recent years annuity rates have decreased significantly, due to falling interest rates and increased longevity, and the lack of a capital payment on the retiree’s eventual death are factors that have caused some people to look at other options to this traditional route.

There have been, and continue to be, some innovations in the annuity market to attempt to address the perceived shortcomings of annuity products, but until recently there has really only been one alternative available to the private pension investor wishing to take an income; namely income drawdown (or unsecured pension as the Government now refer to it).

While income drawdown provides the options of flexible income, potential for a capital payment on the retiree’s death, avoidance of locking into current poor annuity rates and the opportunity to produce a better return overall throughout your retirement, it does so with a risk to the investor.

everyone should consider all the alternatives

The greatest fear of opting for the income drawdown option is that if the investments fall you may be forced to reduce your income level. The extra flexibility of this option comes at an increased risk.

Some alternative retirement options have now been launched in the UK to fill in the gap between conventional annuities and income drawdown plans, offering an unsecured pension but with some guarantees. While these are a relatively new development in the UK, the providers of these products have been using similar products in both America and Japan for the last ten years, where they have been the mainstay in providing retirement income in that time.

The various products currently on offer do differ with regards to costs, income withdrawals and investment options but generally they might offer some of the following features:

• A guaranteed income for life regardless of market conditions or fund performance

• Flexible income options

• Control of the investment fund

• Flexibility with regard to the timing of an annuity purchase at a later date, should circumstances changes

• Continuation of income beyond age 75

The potential disadvantages:

• Income withdrawals may erode the capital value of the fund

• Future annuity rates may be better than the guarantees income available

• High income withdrawals may not be sustainable

• Costs and charges for the guaranteed income will impact on the overall investment performance

These ‘third way’ style products provide an interesting alternative to conventional drawdown and annuities.

As usual, it will be a question of whether they meet your individual needs, objectives and means, but for those seeking growth opportunities with the assurance of a guaranteed income, they may provide a useful option.

Raymond Mulligan is managing director of Johnston Campbell, a company of independent financial advisers regulated by the Financial Services Authority. For further information, please contact raymondm@johnstoncampbell.com or 9022 1010