Pension Freedoms

How to make the most of the new drawdown freedoms without making a mistake –

Income drawdown gives you a variety of options during retirement and complete control over how you use your retirement savings. However, with this freedom comes responsibility. It’s up to you to manage your income so that it lasts for the whole of your retirement, which could be 30 years or more. It’s important to be clear about how you intend to use drawdown and why you think it’s the best way to achieve your goals, compared with the alternatives. You also need to be self-disciplined, because if you’re reckless with the freedoms on offer then you could burn through your pension savings too quickly.

Income drawdown enables you to withdraw whatever you like, whenever you like, from your pension pot, while leaving the rest invested. It therefore makes a variety of retirement strategies possible, which each carry their own risks. For example, you could: Live off the withdrawals from your pension pot, while giving yourself the flexibility to spend more in some years – perhaps to fund big family events or dream holidays. The risk of this strategy is that, through a lack of self-discipline or poor investment performance, you could run out of money and end up dependent on the state.

Cover your basic everyday expenses for life by using some of your pot to buy a lifetime annuity. This will give you a guaranteed income stream and leave you free to invest the rest of your pot or make withdrawals of any amount at any time. The risks here could include locking yourself into a lower annuity rate than you might have achieved by waiting, and/or seeing your pension pot shrink while it remains invested due to underperformance.

Use drawdown initially then use another product to generate income. For example, you could start by living off withdrawals while leaving the rest of your pot invested. You could then use the remainder to buy a lifetime annuity, for example, if your circumstances have changed and you need the security of a guaranteed income, or because annuity rates have improved. Again, there can be no guarantees.

These are just some of the many possibilities under the new pension rules. If you’re considering using a drawdown product then it is really worth seeking advice from a professional.

If you choose any option with an annuity don’t make the mistake off accepting the annuity offered by the company with whom they have been saving for retirement.

No single company can offer the best conversion/annuity rates for every potential annuitant so it makes sense to shop around and see which pension provider is giving the best rates for your particular circumstances.

It is also important to determine what type of annuity is most suitable for you and some of the options we need consider are:

You also need to consider if you are eligible for an "enhanced" annuity from a specialist provider. This may be the case if, for example, you are a smoker, have ongoing or recent health issues or perhaps seemingly less significant lifestyle factors. Such enhancements can increase the annuity by 20-30%.

If you’re considering purchasing an annuity product then it is really worth seeking advice from a professional. It is vital to seek advice at this important stage in your life so that your retirement income is maximised as once you have bought an annuity the terms cannot be changed.

Check out your options with A free and impartial government service about your defined contribution pension options

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