A flexible view of how to fund retirement

Image of Channel 4: Dispatch logo covering the topic of retirement and pension scams


Julie Hutchison

13th January 2015 at 1:50pm

As we approach 6th April, it’s good to see television programmes picking-up on the new pension freedoms which are just round the corner, trying to help inform viewers about the risks and opportunities which lie ahead.

The problem for programme makers is that, in less than 30 minutes, can the full story really be told?

Financial scams

In Dispatches on Channel 4 last night, it was good to see warnings about potential scams, which have been in the news recently.

But anyone watching Dispatches last night could be forgiven for thinking only two choices exist for consumers with a pension, come 6th April.

At times, it felt like a polarised choice between buying an annuity or taking your pension savings in one go as a lump sum.

Flexible income or drawdown

That is not the full picture. A very important part of the retirement jigsaw didn’t get much airtime last night – flexible income, also known as “drawdown”.

This option has been around for years, and is expected to become much more mainstream. With flexible income, you keep your pension savings invested and take money out as and when you need it. As usual, 25% is available as a tax-free lump sum, with the rest taxed as your income. You need to keep in mind that since your pension is invested in the stock market, its value can go up or down.

But there are two key advantages. First off, since your pension savings stay invested, they could still have the chance to maintain their value or grow in a way which beats inflation (compared to cash). And your loved ones may also get the benefit of the new inheritance rules, which mean your pension is passed on tax-free should you die before the age of 75.

The same isn’t true if you take your pension savings as cash, and you could very well sleepwalk into an income tax bill, as I wrote about here.

One size doesn’t fit all, when it comes to how to use your savings to fund your retirement. You might spend some of your ISA, take tax-free cash as a first step from your pension savings, buy an annuity, choose flexible income or take all your pension savings as a lump sum – these options all have their place, and some can be used in combination. That’s why speaking to an expert will help, and Standard Life has a dedicated section of its website to help you find out more information about your choices.

This blog and any responses are not financial advice. A pension is an investment. Its value can go up or down and it may be worth less than you paid in.

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Image rights: Channel 4 Dispatches.