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The retirement income you choose could impact wellbeing

Often as we approach retirement, we look at our finances and wellbeing separately. But the two have a direct impact on one another. With more retirement choices than ever before around how you are able to draw pension income, making a decision that’s not right for you could harm your mental wellbeing and satisfaction.

Research conducted by Legal & General suggests thousands of retirees could be choosing a pension option, or defaulting into arrangements, that they’re not happy with. Since the introduction of Pension Freedoms in 2015, fewer retirees have been choosing to purchase an Annuity, providing a guaranteed income for life. Since the reforms, just 187,000 Annuities have been purchased. This compares to more than 436,000 retirees using Flexi-Access Drawdown, where pension savings remain invested and can be withdrawn flexibly.

However, leaving your pension invested isn’t the right choice for everyone. The research also found that among those considered to have poor or modest incomes in retirement:

  • 19% with their pension invested had not enjoyed life over the past week when asked; compared to 9% among those with a guaranteed income for life
  • 13% without an Annuity felt like they couldn’t plan for the future; 5% with a guaranteed income felt the same
  • 38% of retirees who had put their pension savings into investments felt they couldn’t control their future

Whatever your income at retirement, feeling in control of your finances is important for mental wellbeing and achieving your aspirations.

Emma Byron, Managing Director of Retail Retirement Income at Legal & General, said: “Retirement has entered a new age. Gone are the days of carriage clocks and gold-plated pensions. The idea of a one-size-fits-all retirement is an outdated concept and now, for the first time, people face a real choice in how they want to enjoy their pension savings.”

While choice is undoubtedly a good thing for pensioners, allowing them to match income to aspirations, it can result in challenging decisions. The above findings highlight how important it is to choose a retirement income that reflects your personal goals and attitude to finance.

Choosing the right retirement income

When it comes to taking money from your pension, usually accessible from the age of 55, you typically have three options:

  • Take a lump sum: You can take all or a portion of the money out of your pension to use as you wish. However, taking it all is rarely a good solution, and typically only the first 25% will be tax-free, you would need to pay Income Tax on the rest. So, it’s an option that can result in higher immediate costs and a lack of income in later retirement.
  • Use Flexi-Access Drawdown: This is where you leave your savings invested in your pension. You can then withdraw money when you need to, taking more or less to suit your lifestyle. As your money will be invested, the value can increase and decrease over time. You will also need to ensure you withdraw a sustainable amount to support you throughout retirement.
  • Purchase an Annuity: Purchasing an Annuity provides you with a guaranteed income for life, which can be linked to inflation to maintain spending power too. They can remove some of the worries around taking a sustainable income but also provide you with less flexibility. Depending on the rate you’re offered, it may also provide an income that’s lower than the amount you can sustainably withdraw through Flexi-Access Drawdown.

If deciding between the three options wasn’t challenging enough, some people opt for a hybrid approach. You could use all three options to create a tailored income that suits you. For example, taking the 25% tax-free lump sum, using a portion to purchase an Annuity to provide a base income to cover essentials, and leaving the remainder invested.

What’s key here is creating a retirement income strategy that suits you. But that’s not an easy task; not only do you need to consider your immediate income needs but those of the future too, as well as how life expectancy will have an impact. This is where financial planning can provide you with invaluable insight.

Financial planning can help you see how using your pension could affect your lifestyle and income over the years. We aim to give you the confidence needed to make a decision and enjoy your retirement years to the fullest.

Thinking about a range of financial planning questions can help us identify the type of retirement income that will suit you, such as:

  • What’s your attitude to risk in retirement?
  • Do you have the capacity to withstand potential losses?
  • What other assets do you have that could be used to provide an income?
  • What are your goals once you’ve given up work?
  • Is income stability important to you in retirement?
  • Is leaving an inheritance to loved ones a priority for you?

If you’re approaching retirement and feel confused by the income choices you’re presented with, please contact us. Our tailored approach to pension strategies will help you understand which option is right for you now and in the long term.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.