Planning

Approaching retirement

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The importance of planning your retirement funding

The introduction of pension simplification rules means you get much greater choice when it comes to how and when to take retirement benefits from pensions. However, the most important thing is to plan your retirement funding strategy in advance.

Anyone investing in a pension should remember that whilst pensions are extremely tax-efficient, it's important to regularly review where your money is invested. This becomes more important as you begin to approach retirement when your investment aims may gradually change from growing the value of your pension fund to protecting it.

Will you want to give up work when you retire?

If so, you need to decide whether you'd like to take up to 25% of the value of your pension funds as a tax-free lump sum (known as the Pension Commencement Lump Sum – PCLS). This can be used for any purpose, even generating additional income, although HMRC doesn't typically allow PCLS to be reinvested in a pension.

The remaining pension funds are either used to purchase an annuity which provides an income for the life of the annuitant, or generate an income from the funds, which is known as "drawdown."

You don't have to buy an annuity from your pension provider, you can shop around for the best rate. There are a variety of options with an annuity. They can pay a level income or be linked to inflation, or they can include a pension for your spouse that pays an income if you predecease them. There are even "enhanced" or "impaired life" annuities that take into account certain health conditions.

Drawdown has two variants. Before age 75, an "unsecured" pension allows an income to be drawn from the pension pot; this income can range from zero to a specified maximum and this is reviewed every five years. After age 75, there are both specified minimum and maximum amounts that must be drawn and this is reviewed annually. Some people have used the flexibility of drawdown to delay making a purchase of an annuity until later as they anticipate an increase in interest rates may drive an improvement in annuity rates.

It's possible to arrange to draw benefits in a mixed combination of PCLS and annuities to create a "phased retirement".

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Your financial adviser will be able to discuss all these options with you.

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Everyone's circumstances are different and what applies to one person may not be right for someone else. The suggestions above are based on a general assumption of each circumstance and they are not intended to provide advice or recommendation.