When you’re coming up to retirement, before you consider how you’re going to spend it, you need to consider how you will get to your money. So how do you get your pension? Broadly speaking, there are three options available to you, these are:
- Final Salary Pensions
- Income Drawdown
An annuity is a financial product that can be bought if your pension is currently just a lump sum of money. You use your pension pot to by an annuity. The annuity offers a fixed income for the rest of your life. Some annuities can also provide for half the income to be paid to your spouse when you pass away.
In simple terms, an annuity is essentially a ‘bet’ with the annuity provider based upon how long the provider predicts you will live.
An annuities provider will offer you a rate primarily based upon:
- What they believe to be your life expectancy – Those who have health problems are thought to have a reduced life expectancy. For example, a heavy smoker can get a better income through an Enhanced Annuity.
- UK Gilt (Bond) rates – This is what the provider will usually invest the lump sum you give them in. The better the return they can get, the more generous they may be in order to beat their competitors.
Final Salary Pensions
A final salary pension, also known as a ‘defined benefit’ pension, is an annual pension income usually based on a proportion of your salary, which will be paid out for the rest of your life.
Final salary pensions are usually calculated based upon an ‘accrual rate’ which is multiplied by your years of service with a particular company. For example the accrual rate might be 1/60th of your salary per year you’ve been employed.
Another way they can be calculated is based upon an average of your salary across your career. They are also ‘index-linked’, meaning the figure rises, so that the value of the pension keeps up with inflation and the increasing cost of living.
If you have a final salary pension, you don’t need to buy any further financial products to enjoy its benefit. However, if you want a final salary pension scheme, you may be out of luck. The schemes have fell out of favour with pension providers because they can result in a significant amount of money being paid out per pensioner, that isn’t feasible with the increase in life expectancies.
The final type of financial product you can use to get your pension is the income drawdown. This allows you to withdraw funds from your pension, while the rest remains invested in the stock market. You are able to withdraw more than you would get from an annuity.
Income drawdown provides a more flexible solution to utilising your pension pot. But there are points to consider before choosing to buy an income drawdown:
- Because the remainder of your pot remains invested, the value of your pension pot can go down as well as up
- Income drawdowns are often subject to complex charges that depend on your circumstances
- There are complex rules on how much you can withdraw, and when
Income drawdown therefore is not appropriate for everyone, and you should consider seeking independent financial advice before purchasing such a product.
What Can SM Financial Services Do For Me?
SM Financial Services are able to offer a free consultation with their at-retirement service. The free consultation allows you to see whether we can improve your current plans for retirement before you have to worry about fees.
We are independent financial advisers. We don’t have any affiliation with any particular financial institution, and we look at the whole market for financial products, not just a pre-approved list.
We are connected to Simpson Millar LLP, a national law firm. Therefore, we are able to also offer legal services related to retirement, including Wills, Powers of Attorney and Estate and Inheritance Tax Planning.
- Wills – We provide a fast, reliable and hassle-free Will drafting service, specifically tailored to your needs. Whether you require a simple Will, trusts for children or care planning, our dedicated team can prepare and guide you through the twists and turns of tailoring it to your needs and family.
- Lasting Powers of Attorney – No-one wishes to think about a time where they may not be able to manage their own affairs. However, if it occurs, a Power of Attorney means someone can legally manage your affairs for you. If there is no Power of Attorney in place, a family can be left with no way of assisting their loved one other than by applying to the Court of Protection for legal authority. In an emotional time, such a long and costly procedure can cause unnecessary stress and upset. We understand that appointing an Attorney can be stressful, and our team can help you do so by preparing Lasting Powers’ of Attorney. These are prepared only once and last for a lifetime. Once appointed, should you lose the ability to manage your own affairs, your Attorney will be able to continue making decisions for you and keeping things running smoothly for your future.
If you would like more information about the straightforward retirement solutions we can provide download our free guide and start planning your retirement today.