Mix and match your pension with work
Question: I am soon to retire and have a number of small pension pots, what are my options given that my aim is to carry on working to some extent, and want to maintain a degree of flexibility?
Answer: The scenario you are describing is one that we hear a lot from clients. The stereotypical pipe and slippers retirement has become outdated as individuals facing retirement now are far more active and fitter than their predecessors even 20 years ago.
Many are also faced with an inadequate income in retirement and are being forced to consider continued employment in order to supplement their income needs.
These factors combined are effectively blurring the boundary between retirement and work.
As a result the first phase of retirement is likely to see some individuals mix and match some pension income with part time work, whilst others may wish to see more of the world visiting friends or family overseas while they have the health to, thus requiring a higher income level initially to match their spending habits.
Thus, the traditional concept of making that once in a lifetime decision to purchase an annuity by converting the pension fund they had accumulated to a fixed income for life may not necessarily be appropriate in today’s ever evolving environment.
Product providers have therefore tried to innovate with more flexible products in an attempt to match the flexible income requirements of those at the point of retirement.
Drawdown was the first of these innovations, which have existed since the mid 90s. This allows an individual to vary their income on an annual basis from nothing, to the maximum which is set by the government.
However these products were mainly regarded as only suitable for those with larger pension pots or other assets they could call upon to generate an income.
More recently we have seen the emergence of what are often referred to as ‘third way’ products.
These retirement solutions permit income flexibility and offer potential guarantees to protect investors against poor investment performance.
This is achieved by purchasing an annuity over a fixed term, say five or 10 years, rather than over life.
Many of these providers hail from the US and like many other financial institutions recently, have come under scrutiny with regards to their financial strength and ability to honour any guarantees or promises made.
Both the drawdown contracts and ‘third way’ solutions, not only offer an investor some flexibility in terms of how they draw their income but also allow the individual to take a ‘wait and see’ approach before making a final decision on how they eventually wish to draw their income.
This approach could be of potential benefit if health deteriorates or as there have been over the years, legislative or product developments.
All this flexibility will come with a cost.
Firstly you need to ensure you fully understand the product charges of entering into such arrangements, as high charges may eat into any potential investment gains.
Secondly, any investment backed solution comes with the risk that if investment returns fall, you will ultimately see your income both now and in the future fall as well. Finally, with increases in longevity, low annuity rates are going to continue and maybe even deteriorate further, meaning that even if you make investment gains, the fact that the rate you ultimately convert your income into is falling, the net effect could be that you are worse off.
As ever, you need to speak to someone who can help you navigate your way through the retirement maze and ensure you end up with a tailor made solution that will match your needs.
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 firstname.lastname@example.org or (028) 9022 1010