GMP Independent Financial Advisors LLP

Thu, 6 Aug 2009 11:21:09 GMT

Assuming you have saved diligently over the years, when you reach retirement age you will have some important choices to make – the first being when that retirement age will be. As the minimum age increases from 50 to 55 in April 2010, this needs some thought. IN addiiton, the statutory age (ie: the age when you become entitled to state benefits) is also increasing for women from 60 to 65 by 2020, to equalise them with men.As a general rule, it is better to hold off retirement for as long as possible. Deferring state, employment and/or personal pension benefits should ensure you receive a larger income as annutiy rates tend to improve, the older you are. Equally, if you choose to downsize your career but can still earn some income after your chosen retirement date, you may be able to 'phase' your retirement, using only a portion of your pension fund to start with, leaving the remainder invested until a bit later.

However, the most important choice you will make will be over the actual annuity, or unsecured pension (also known as income drawdown) product, as this will determine your ultimate income. There is also the option of taking 25% as a tax-free lump sum, which could pay for a long holiday or be re-invested elsewhere to generate additional income. An annuity will provide you with an income stream for life, but this does mean you give up all right to the capital – and your descendants will not inherit anything if you die shortly after retirement. You therefore need to think carefully about whether you include guarantees in your annuity choice (thereby securing some of that fund value at least for the short term) and also the rate being offered to you, particularly if you smoke or have certain health conditions.

With an unsecured pension (income drawdown) arrangement, you retain your entitlement to the capital and draw an income directly from the value each year. This will likely be less than you might receive with an annuity, but it does mean you preserve some of your pension fund - at least until age 75. These schemes do, however, leave your investment in the hands of the market so you risk the value going down as well as perhaps going up. They are now quite flexible, though, and offer access to a wide range of underlying investment funds so you can decide what risks, if any, are worth taking and allocate your money accordingly. An adviser will guide you through the process and make sure you understand everything before you make a decision.

Finally, you could decide to take an annuity for part of your pension fund, giving a basic income stream, and then take some risk with the remainder of your capital. Such a combination could offer a decent half way house for some, so do examine all your options carefully before making your move.

For advice on pensions and retirement speak to Mark or Clare at GMP Independent Financial Advisers LLP on 0207 2886400

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