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Andrew James

Manager - Advice Policy

08 November 2011

Drawing pension benefits

With the removal of the default retirement age ensuring that employers cannot now impose a specific retirement age, retirement does not now always take place on a specific birthday. For some, the day you receive that gold watch from your employer and start your retirement is still a one-off event, but for many it now tends to be a more gradual transition as you scale back your working hours and focus on other things. Whilst this can be useful in lessening the shock of ceasing work all of a sudden it does mean you need to be more flexible in achieving a balance between earned income and retirement income.

Generally you need to slowly increase the sums you take from pensions and other investments as you work less and therefore earn less. With this in mind it is not always the right decision to merely purchase an annuity with all of your pension fund. Annuities offer certainty of income which is great when you are used to a salary coming in but they are, in many ways, inflexible as once purchased they cannot be altered.

The good news is that you do not have to take your income in this way. If you wish you can leave the money invested in a pension and take the income directly from it. There are maximum amounts of income that are allowed to be withdrawn but the minimum is nil and you can change your mind about how much you want whenever you like, as long as you don’t exceed the maximum each year. This approach, known as pension ‘Drawdown’, does leave you with an element of investment risk but the flexibility it offers fits well with many people’s staged retirement plans.

You don’t even have to make a choice between buying an annuity and taking drawdown. Pensions are flexible enough to allow you to do both. So you could take some income via an annuity and the rest from drawdown. Over your retirement you may decide to increase your annuity income by purchasing further annuities and reducing the amount you have in drawdown. This helps alleviate the risk of buying your annuity at the wrong time as you purchase them over a number of years.

Whatever your final decision it’s good to know that your pension can be as flexible as you need it to be but do seek independent financial advice to find the solution that best suits your needs.

The information on this website is not intended to be, and should not be construed as investment advice. Whilst considerable care has been taken to ensure the information contained within the commentaries and articles is accurate and up-to-date, no warranty is given as to the accuracy or completeness of any information and no liability is accepted for any errors or omissions in such information or any action taken on the basis of this information. The opinions expressed are made in good faith, but are subject to change without notice.