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Flexible approaches to pensions open

QUESTION: I am due to retire in the near future and am concerned about the value of my pension funds and what I should do. What are my options?

ANSWER: The question you ask is one faced by many at this point in time. The current global economic and financial turmoil leaves many individuals stuck in a quandary as to what they should do.

Life events such as retirement can rarely be postponed due to what is happening around the world. The issues you face, however, are not just linked to the temporary problems facing the economic system, more permanent trends are causing individuals reaching retirement concern.

Firstly, there is the issue of increased life expectancy. People are living longer, meaning the funds that have been accumulated for retirement have to be used over a longer period of time.

This has been the main reason for the drop in annuity rates which have fallen substantially from the highs of over 20 years ago.

These trends can only continue, for example it is estimated that more than two out of three of today's 35 year olds will live to see 85, and one in seven will receive a congratulatory card from the monarch on the day they celebrate their hundredth birthday.

Those who are now aged 65 have more than six chances out of 10 in reaching 85, while more than one in five of that age group will achieve 95 years of age.

Secondly, with interest rates where they are, and the likelihood that they will continue to follow a downward trend, will mean those in retirement will suffer from lower returns from any investments backed by debt, such as cash or government gilts.

Falling returns and the expectation that the monies will need to be used over a longer term are not good combinations.

Added to this is the uncertainty over long-term inflation rates and the fact that prices are expected to rise at a higher than expected level.

This can only mean that what you do with funds accumulated for retirement purposes has to be a carefully thought out strategy.

So in the short term, if your funds have suffered a substantial drop due to the recent financial turmoil, now should not be the time that you in effect crystallise your losses by way of entering into a traditional annuity.

In doing so you could be, in effect, consolidating your funds out of a portfolio of stocks and shares into a product that will not offer you any upside if and when the markets recover.

The important thing to consider here is what was touched upon earlier; these decisions should not be viewed as short term issues, but what the effects will be over the longer term.

So if an annuity is the best option for you, you should consider ones that invest in a wide range of assets, and therefore will offer potential for increases going forward. This will, in effect, partially offset any losses you have experienced recently.

Similarly, there are other options available to you which may avoid the need to consolidate your fund into an annuity.

The market has changed significantly in the last two years, much of which has been an attempt to combat the problem I highlighted at the outset of increased life expectancy.

More flexible approaches to planning for retirement income are open to you and many of these are investment based, some with built in guarantees, which will allow you to ride out the problems experienced in these last 12 months or so.

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 or (028) 9022-1010.

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