Drawing Down All the Options – Pension Lump Sums and Other Alternatives

By Simon Lawford

When it comes to thinking about your retirement, the low rate of interest environment, coupled with the past few years of stock market chaos, could have you considering how much you will eventually receive. Under normal circumstances, you would look at your pension fund, compare a few of the pensions on offer and then just choose the best one. But what happens when none seems to offer you very much at all?

On the upside, there are at present a considerable number of options for your retirement fund which can at the very least help to maximise your prospects – and each of these should at least be considered. Afterall, your pension took a long time to build up so you want to make sure you make the best of it.

One option available is commonly called income drawdown or, more technically known, as an unsecured pension. Instead of buying one of the annuities on offer instantly, this direction allows you to retire but defer that purchase decision “and in the meantime, draw an income straight from the pension fund itself. This means the fund can stay invested while you explore annuity rates to find the better deal – or potentially even indefinitely if your circumstance dictates. The primary benefit of this option is the flexibility it provides over how and when you buy an annuity and, subject to an annual Government maximum (defined by their Actuary and reviewed every 5 years), you can meanwhile, take whatever amount of income you need.

So , if you would like to carry on working, you could at first draw a smaller pension but increase the amount slowly as you scale back your hours. Or, you could take your tax free pension lump sum but leave taking any income until further down the road. Alternatively, if you believe annuity rates might improve – either because interest rates might rise or as you are just getting older – you can use this approach to defer the actual purchase. However, there isn’t any guarantee that rates will rise but at the least you get some breathing space to make sure and, meanwhile, you will keep control of the way the money is invested.

There are disadvantages. On purchasing an annuity, your income will generally be guaranteed for life (even if the payments might fluctuate) and the charges for pension provision effectively stop. Nevertheless with an unsecured pension, the charges continue which can impact the value of your fund and, as it remains invested in the market, the value of your fund could actually fall because markets do. In any case , you only retire once so it is far better to think about everything and discard it than not consider it in any way. At least then you know you have made the correct decision.

Info thanks to Adviser Hub. Before reaching any conclusive decisions with reference your retirement, whether this involves purchasing an unsecured pension or taking an early pension release, we do recommend that you carry out a full pension review with the help of a fully qualified pension adviser.

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Tags: Finance, pension lump sum, Pension release

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