7th September 2017 at 4:20pm
Nowadays we have a fantastic amount of freedom in how we can take our pension money in retirement.
If you have a pension where your money is invested, commonly called a defined contribution pension, you no longer have to buy an annuity – a regular income for the rest of your life. You have much more choice and flexibility to help you make the most of your pension money in retirement.
You can take it all as a lump sum or you can choose to leave it invested – giving it the opportunity to keep on growing. You can then either take a regular income from it or dip into it – taking out money as and when you need it.
So, if choice and flexibility are the silver lining, where’s the cloud?
Even before these pension freedoms were introduced in 2015, research was telling us that many people no longer planned to buy an annuity. And our experience has backed this up. We’ve seen our customers take advantage of the increased flexibility, with fewer choosing to buy an annuity.
The problem is many people’s pension money may still be in investments that were specifically designed for buying an annuity at retirement. This is where the clouds start to gather.
If you’re in a company pension and haven’t made an investment choice, your money will probably be in an investment strategy chosen by your employer. This is sometimes called a lifestyle profile or lifestyle fund. These strategies are also the ‘default’ option for some personal pensions too.
The benefit is that they gradually move your money from investments that aim to grow the value of your money, into investments designed to get your money to where it needs to be by the time you retire – it’s great because it means you don’t need to do anything. But many strategies are still set up for buying an annuity.
That means they’ll move your money into investments designed to move in line with the cost of buying an annuity. Here’s how it works – if annuity rates fall, the value of your investments should rise as you’ll need more in your pension pot to buy a higher income. On the other hand, if annuity rates rise, the value of your investments is likely to fall as you won’t need as much to buy the same level of income.
But if you aren’t planning on buying an annuity, annuity rates aren’t your primary concern. And you may be taking unnecessary risk. Annuity rates can move up and down, meaning that investments designed to move in line with them can move up and down in value too, sometimes quite significantly. If your investments fall in value significantly just before you retire, this could have an impact on the value of your pension pot and your retirement plans.
A note about bonds
The investments used in strategies that target annuities are largely long-term bonds issued by the UK government. Bonds are often thought of as low risk investments. But over the past few years there’s been a lot of volatility in bond markets, meaning that there have been quite substantial fluctuations in value.
So what should you do?
- First of all, think about what you’re likely to do with your money at retirement. Will you buy an annuity? Withdraw it all? Leave it invested? Do a bit of everything? Or are you not sure what you want to do?
- Next, check where your money is invested. If you’re in an investment strategy such as a lifestyle profile, make sure it’s aligned to your plans. This is particularly important if you’re getting closer to retirement as this is when the strategy will start making changes to where your money is invested.
- If it isn’t aligned to your plans, have a look at your other investment options. If you’re not sure what’s best for your own individual circumstances, it’s a good idea to consider paying to get professional advice from an expert.
If you’re in a company pension, your employer may have already made changes to your investment options to reflect the flexibility that pension freedoms have introduced. Check your pension website or speak to your employer for more information.
At Standard Life, we’ve also made changes to our range of lifestyle profiles to reflect the different ways our customers are now using their pension savings. This includes lifestyle profiles for buying an annuity, taking your money as a lump sum or leaving it invested.
Recognising that some customers may not know what they want to do right up until they retire, or may want to use a combination of options, we also have strategies that give you flexibility to take your money as you want.
Ultimately though, pension freedoms put more responsibility on your shoulders – you need to make sure you know what you can do with your money and that you’re invested appropriately.
We have a lot of information to help you make those decisions – get a free personalised report on your retirement options online. But if you’re still not sure what’s best for you, speak to an expert.
The information in this blog and any responses to comments are not financial advice. The value of investments can go down as well as up and may be worth less than you paid in.
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