The point at which you wish to, or are able to, retire is a significant milestone as far as financial planning is concerned and decisions made at this point in ones life with regard to generating income in retirement, particularly from pensions, are critical.
There is a multitude of different options available and we strongly recommend that clients only consider these with the benefit of independent financial advice.
Although we have previously outlined such these, in a new series of articles we shall take the opportunity to look at key retirement options in some depth. However, before we do so, it is important to explore some of the general issues one should consider at the outset before examining the specific means of providing for your retirement.
State of Health / Lifestyle – An individual’s state of health and also that of any spouse or civil partner can greatly influence the option chosen to provide income in retirement. This is because a variety of medical conditions, or lifestyle issues such as smoker status and weight, can affect the level of income from annuities. Unlike when applying for life or ill health insurance, such as critical illness or income protection cover, this is one occasion where a client can benefit from poor health.
Dependants – When considering their pension options, clients should consider the need or desire to provide for their spouse / civil partner upon their death and whether this is to be in the form of an income or lump sum. The continuing earned or pension income enjoyed by the survivor will be an influencing factor in this decision.
Sources of Income / Expenditure – Income needs should be assessed relative to expenditure. Clearly where income in retirement is from a single source or is barely adequate to meet monthly commitments, it may be preferable that no risk is attached to it’s production in order to ensure that expenditure needs are satisfied. Equally, the relationship between income and expenditure may allow consideration of indexation of pension in payment, as to purchase this valuable benefit a lower initial pension would be received at the outset. Clearly this may only be acceptable if surplus income exists to start with.
Attitude to Investment Risk / Investment Objectives – By accepting some degree of investment risk, a greater level of pension may potentially be enjoyed. Conversely, this could also lead to a fall in pension levels if investment returns are inadequate. An individual should consider whether there is a tolerable level of risk within the wide range of options available and if so what the corresponding benefits are. A factor that may influence any decision is whether there are alternative sources of income available, which may balance any investment risk adopted.
Tax Planning – The first question to be asked is whether the tax-free cash lump sum (also known as pension commencement lump sum) is required and if so at what point.
Where an individual’s sources of income and / or capital are numerous, or where their financial affairs are complex, efficient tax planning may be a key factor in retirement income planning. Planning effectively for tax may mean phasing retirement or facilitating a variable income. Examples of clients who may require a more sophisticated approach to their retirement planning could be business owners who are retiring and / or selling their businesses or individuals who enjoy income from investments which may be variable.
Clearly the considerations are numerous and are best made with the benefit of professional advice. However, once decisions are made in regards to these issues, an appropriate means of proving for income in retirement can be recommended.
In the coming weeks, we shall the take the opportunity to cover the key retirement vehicles through which pension income can be produced.