Retirement income – exploring your options

Colin Calway

Origen Private Client Adviser

Planning ahead and understanding your future income needs can make for an enjoyable retirement and remove some financial worries. We help our clients review their financial goals and advise how to use retirement funds efficiently by making them aware of key financial considerations, so that they are in financial control during retirement.

Preparing for retirement
If you are approaching retirement there are a range of options that could be considered to boost retirement income. A guaranteed income through an annuity or using enhanced or impaired life annuities may be an option if you have any conditions which may impact your health, or simply exercising your Open Market Option to search the marketplace for the best annuity options available. Alternatively you can consider drawdown either for all or part of your investment so that your income is flexible but subject to investment risk.

Since the introduction of pensions freedom in 2015, annuities have become much less popular as a way of converting a pension fund into income. The most recent figures from the Financial Conduct Authority show that over five times as much money is placed in income drawdown now as goes towards annuity purchase. Annuity rates hit their lowest level since 1994 in September 2019.

The longer term fall in annuity rates reflects declining interest rates, which have been on a multi-decade downward path. In addition, increased life expectancy has put downward pressure on annuity rates, although this effect has receded latterly as recent statistics have suggested life expectancy improvements are flatlining.

Drawdown brings investment and mortality risks – investment returns may be below expectations and/or you may outlive your pension pot. If nothing else, the annuity rate can provide a benchmark against which to consider the rate of income withdrawals.

Our guide can help you to consider the retirement options available and our advisers can then help you make decisions which best meet your needs and circumstances.

During retirement
In retirement, there are several factors to be aware of, such as the impact of inflation on your retirement funds, State Pension age changes, and also making sure your income needs reflect your changing goals and objectives. Managing retirement income is an ongoing challenge and needs to be reviewed regularly.

1. Tackling inflation 
Inflation has fallen to its lowest level in almost three years, but you still need to take it into account in deciding on your income needs in retirement. The current annual rate of inflation is 1.5%, below what is still the Bank of England’s central target of 2.0%. But even at these historic low levels, over time, inflation can have a serious impact on the real purchasing power of money.

Over the last five years, between October 2014–October 2019, Inflation (as measured by the Consumer Price Index or CPI) rose by 7.9%, while over the last ten years CPI has increased by almost a quarter at 24.2%.

2. The State Pension – A cornerstone of retirement income
The State Pension can provide a foundation for income in retirement and most UK residents will qualify. The State Pension age is being increased from age 65 to age 66 between December 2018 to October 2020 and a further increase to age 67 is planned between April 2026 to April 2028.

How much State Pension you will receive and when you will start to receive it will impact your retirement income needs. You can request a State Pension forecast at http://www.yourpension.gov.uk/

The State Pension currently benefits from the Triple Lock Guarantee which means payments increase each year by the higher of:
• Inflation – measured by CPI (Consumer Prices Index);
• 2.5%; or
• Average Earnings;

In April 2020, the State Pension increases are based on the greater of:
• The annual increase in the CPI to September (1.7% in 2019);
• 2.5%; or
• The 3-month average earnings increase to July (3.99% in 2019).

So this year average earnings are the clear winner, but subject to the Department for Work and Pensions formal announcement, the new State Pension (for anyone reaching state pension age (SPA) after 5 April 2016) and basic State Pension payments will rise by 3.99% in April 2020.

However, other state pension entitlements, such the old additional pension elements for those who reached SPA before 6 April 2016 do not benefit from the Triple Lock Guarantee and will therefore only increase in line with CPI, i.e. by 1.7%.

Helping you get the best out of retirement
Our advisers can help you prepare for retirement , but it is also important that you continue to review your income in retirement to take account of inflation and State Pension payments, so that your income is sufficient to maintain your standard of living in retirement.

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.  The value of tax reliefs depends on your individual circumstances.


CA4854 Exp: 01/2021

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