How to protect your retirement income
Thursday, 15 December 2011 04:35
By Kate Saines
It’s an all too prevalent fear for retirees these days – not having enough cash to fund their retirement.
In fact, so widespread is this anxiety it comes second only to failing health as the biggest concern for retired people over 55 and is the number one worry for those nearing retirement.
That’s according to MGM Advantage, a retirement income specialist, which has just released a report showing retired people feel they need an average of £98 extra a week to feel financially comfortable.
As a result of these findings the firm insists more needs to be done to prevent the retirement income gap from widening further by, for starters, encouraging more people to shop around using the ‘open market option’ when purchasing an annuity.
This means not automatically reverting to your pension provider’s annuity but capitalising on your right to find a better deal with another company.
Andrew Coles of financial adviser Beard & Coles believes there are a number of methods of protecting your retirement income and using the open market option is just one.
He reckons it’s possible to be able to increase your income by ten per cent or more simply by shopping around.
But he also advises clients to take advantage of the pension commencement lump sum (PCLS) – also known as tax-free cash - when taking pension benefits.
Mr Coles explained: “Your income from your pension pot will be taxed therefore reducing your net income. Your PCLS is tax free and this can be re-invested to provide a more tax efficient income for you.”
Choosing annuities
When shopping for annuities it pays to know your product and this includes being familiar with the pros and cons. Choosing the annuity which suits you is essential in protecting your retirement income.
Pick a traditional annuity, or a ‘standard annuity’ and you’ll receive the same income each year for the rest of your life.
Mr Coles said taking this route means you are guaranteed an income for life but there is also no flexibility in the product, you’ll be locked into an agreement for life which cannot be changed.
You might, then, prefer a fixed-term annuity which provides you with a set income for a specified period of time. At the end of the term you’ll get a guaranteed maturity payment.
This could potentially be invested in another retirement product or annuity. Whatever you do with it, however, it means the money is only tied up for the fixed term period specified which can be between three and 25 years.
Mr Coles said: “Fixed term annuities allow for changes in your circumstances. Income can be reduced at the end of a fixed term, however if you have an illness during that term, when it comes to purchasing another annuity you are likely to get a higher income.”
He also explained the fixed-term route provides more options in terms of leaving money to a spouse or children.
Investment-linked annuities are another option. They provide a way to potentially increase your income by linking your annuity to investments such as gilts or bonds.
However, as with all investments – performance can be both good and bad. Mr Coles said: “In general, upon retirement, clients are looking to reduce risk, therefore investment-linked annuities don’t suit many clients.”
Whatever happens, choosing your annuity is key to protecting your retirement income. “Your personal income has to last for the rest of your life, so getting the correct annuity is very important,” said Mr Coles.
“Being comfortable with the annuity you buy and knowing why you have bought it is a decision that can affect the rest of your life.”
Free Guide: Top 10 tips for improving your pension
Getting the right portfolio
Ensuring your pension is invested in the correct way – or, more to the point, a way which suits your needs – is also an important factor in protecting your retirement fund.
While it’s essential the portfolio of investments produces strong returns while you are saving for your pension, this becomes even more important as you reach retirement.
At retirement, said Andrew Coles, it is essential your portfolio suits your needs and also your attitude to risk.
This is because, at this stage in life, the impact of any losses to your investments – for example big drops in the markets – will affect you more than when you were working.
There is less time, as you approach retirement, for funds to recover and to replace lost funds, Mr Coles explained.
It means reducing risk with existing capital becomes a priority and most people will benefit from switching into less risky funds at that stage and having a well-diversified portfolio.
If you are still saving for your pension, meanwhile, you should consider implementing an annual increase to your pension.
Mr Coles said: “Over time the value of your money will be reduced by inflation, so adding an annual increase linked to the Retail Prices Index (RPI) will help maintain your spending power as you get older, and more often than not will pay for itself within ten to 15 years.”
Delaying retirement
Putting off retirement for several years is a pretty obvious way of saving a bigger pension pot and therefore increasing your income.
But this is not a failsafe option as leaving money invested in the markets means you are increasing the time your cash is at risk from potential falls. You are essentially taking the chance that while your money might increase it might also decrease.
Whether you make this move is, again, a matter of your attitude to risk. Mr Coles said if you are prepared to take some risk to achieve a higher fund then delaying retirement is a viable option.
“You have to be prepared,” he warned, “to end up with a smaller income if investment markets do not provide the expected returns.”
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Get financial advice
Seeing a professional, independent financial adviser is a good idea when it comes to taking your pension.
Mr Coles said: “They will be able to provide you with the best income available as well as guiding you through applications for an impaired annuity if you are entitled to one.”
He reckons, in general, the adviser’s fee will be more than covered by the increased income they will help you generate.
Andrew Coles Top Five Tips for Protecting your Retirement Income
Tip One
When taking pension benefits, take advantage of the pension commencement lump sum (PCLS), or tax-free cash.
Tip Two
Always make sure you make use of the open market when purchasing your annuity and don’t simply accept the offer from your pension provider.
Tip Three
Consider if you are eligible for an impaired life annuity. If you have suffered or are suffering from an illness then you might be able to apply for an impaired life annuity offered by a specialist insurer. This can increase your annual income by a surprising amount. An independent financial adviser will be able to help.
Tip Four
If you are looking to secure an income from a non-pension fund then you are able to use certain investment vehicles to guarantee you an income for life, with the possibility of increasing the income if the underlying investment grows. These vehicles also allow you to access all of your money should you need it. These "income for life bonds" come with higher charges than standard funds however they ensure an income even if your funds are completely depleted.
Tip Five
Increase your pension contributions annually. Over time the value of your money will be reduced by inflation, so adding an annual increase linked to the Retail Prices Index (RPI) will help maintain your spending power as you get older, and more often than not will pay for itself within ten to 15 years.
Free Guide: Top 10 retirement tips
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