How to blend your pension options

Since pension freedoms were introduced in 2015, there have been a wide variety of ways to take one’s pension. For example, you might decide to use part of your pension pot to purchase an annuity, thus ensuring you’ll always be able to cover your essential outgoings. You might then place the remainder in drawdown to access flexibly for things like going out to eat, pursuing hobbies and going on holiday.

 

Or, you might decide to place the whole of your pension into drawdown and use whatever is left later in life to buy an annuity. The benefit of this second option is that as you get older, you may become entitled to a higher income. This is called an enhanced annuity and you may be able to get one if you suffer from a health condition such as high blood pressure, heart disease or diabetes.

If you have multiple pension pots, you may even choose to allocate a certain use to each pot (provided that your pension provider allows your funds to be used for this purpose). So, you could use one pot to buy an annuity, dip into another occasionally by taking ad-hoc cash lump sums and put a third into drawdown to access flexibly. Provided you have taken the correct advice to ensure your plans are possible and suitable for your circumstances, the world’s your oyster!

The benefits of a blended approach to retirement planning

There are many benefits to blending your pension options during retirement:

  • It provides stability without sacrificing flexibility.
  • Placing some of your funds in drawdown ensures your pension still has the potential to grow, but having a guaranteed income will help reduce the impact of any stock market volatility.
  • Even if an annuity covers your expenses, having some money in drawdown will enable you to accommodate large or unexpected expenses (such as a child’s wedding).
  • It allows you to tailor your plan to your particular concerns. For example, if you’re concerned you might overspend, for example, then you could buy an annuity with a larger proportion of your savings and put the rest into drawdown for ‘fun’ spending.
  • You can balance your own financial needs in retirement with the desire to leave an inheritance for your spouse/future generations when you die. An annuity can’t usually be inherited, but any remaining income left from drawdown can normally be passed on.

The value of financial advice

Depending on your circumstances, your retirement income may have to last you several decades. A regulated pension adviser will have the knowledge and expertise to allocate your pension funds to the best providers and schemes for your circumstances and in line with your concerns and goals for retirement.

 

For example, if a client was worried about what would happen to their spouse after they died, one of our advisers might suggest that they purchase a joint annuity (which transfers to a spouse or beneficiary after the death of the policyholder) or to put their savings into drawdown (any income remaining can usually be transferred after death). If a client wanted flexibility but were concerned about stock market volatility, we would search the market to find a pension provider offering an investment portfolio that matches your attitude to risk.

Different pension providers will also charge a range of different fees to look after your pension, for example management fees, administration fees and exit fees – to name but a few! Unfortunately, they may not always present these charges in the most straightforward way, so it’s important to take financial advice to ensure you’re not paying over the odds.