Navigating your retirement income choices for 2024

Liv Butler
Authored by Liv Butler
Posted: Tuesday, January 2, 2024 - 09:40

As you approach retirement, it’s likely that you will be looking at ways you can add to the State Pension of £203.85 per week. While the State Pension provides a foundation, making the best decision about your other options can enhance your lifestyle for the years ahead.

Many of us will of course have some form of fund built up in at least one pension scheme. But understanding the options for turning these funds into income can appear complex. Thankfully, the basics are relatively simple – and help to navigate through the complexity is readily available.

The two primary types of pension scheme are defined contribution (final salary) and defined contribution (money purchase) schemes. These both enable you to enjoy extra income in retirement, but they are very different in terms of how they do it…

Final salary pensions

In a final salary workplace pension scheme, the income is guaranteed and is a percentage of your final or average salary. Your scheme will typically arrange this for you, so it scores high on convenience and simplicity.

You may still have some decisions to make, however. For example, some schemes let you take some money as a lump sum first. You may be able to take up to 25% tax-free, although not all schemes allow this. And remember that however much you take up front, it will reduce the level of the regular pension payments you then receive for life.

Money purchase pensions

Money purchase schemes are much more common today, especially in the private sector. These schemes provide you with more flexibility about your pension income, which does mean there’s more to think about.

Here are your three main options for using the money saved into a money purchase scheme to provide you with retirement income:

Lump sum withdrawals. You could simply choose to keep your pension savings invested in the existing scheme, taking lump sums out when you need some cash. The first 25% of each withdrawal will be taxable. One reason you may choose this option is if you wish to defer decisions regarding drawdown or annuity (see below) to a later date. There are disadvantages however, including a lack of flexibility about how your money is invested compared to drawdown.

Drawdown. Opting for drawdown involves transferring your pension fund to a drawdown provider, and then withdrawing funds as needed. This may seem the same as the lump sum option above, but it typically offers you more investment flexibility. Also, this option lets you take a one-off lump sum tax-free withdrawal of up to 25% of your pension fund.

Annuity purchase. The above options offer flexibility and the opportunity to benefit from investment growth. However, they also come with the risk of poor investment performance, so your income level isn’t guaranteed. In contrast, an annuity transforms pension savings into a guaranteed income, either for life or a fixed term. Your money is no longer invested, so your income won’t be affected by market fluctuations. You can use an online calculator to see how much income you could get with an annuity.

Choosing between these options can appear daunting but free help is available from the government-backed Pension Wise service. Everyone who is aged 50 or over and has funds saved into a money purchase scheme is eligible for a free 60-minute appointment with a pension expert.

Other sources of income in retirement

In addition to pensions, there are various other sources of income that might contribute to a well-rounded retirement plan:

Savings and investments: Bank savings accounts, Individual Savings Accounts (ISAs), stocks, shares and other investment vehicles offer flexibility in supplementing pension income. However, prudent financial management is essential to avoid the risk of depleting these resources prematurely.

Downsizing: Opting to sell your home and relocate to a smaller or more affordable residence can inject a substantial sum into your retirement fund. However, it is crucial to carefully assess associated costs, such as stamp duty, to ensure the financial feasibility of this option.

Equity release: While considered an expensive form of lending, equity release provides the advantage of eliminating the need for regular repayments. Instead, the borrowed amount and accrued interest are typically repaid through the sale of your home, either upon your passing or when entering long-term care. You will need to take specialist advice before considering this option, but in the first instance you can get an estimate of how much equity you could release.

Government support: Numerous pensioners receive support from national or local government to supplement their State Pension. For instance, Pension Credit is available for individuals over State Pension age with incomes below specific thresholds. Many pensioners are missing out on money they are entitled to, but you can use benefits calculators to check your eligibility.

It's essential to note that this information serves informational purposes only and should not be considered financial advice. Before making significant decisions about your retirement income, seek professional guidance to ensure your choices align with your unique financial situation and goals.

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