Most people are pretty clear in their aim to build up as substantial a retirement pot as possible by saving whatever they reasonably can and then growing that nest egg over the decades through clever investment choices. But the question of what to do with those monies after retirement day comes can be more fraught with uncertainty.
The time-honoured (and indeed hitherto often mandatory) option was to purchase an annuity, whereby a lump sum is exchanged for a guaranteed income until death. Slightly grim though the prospect is, providers make complex calculations about just how long this period is likely to last and then make annuity offers accordingly (which has often meant those who are smokers or otherwise in poor health could gain better rates).
Annuities fell somewhat out of favour in the years after “pension freedom” was granted in the UK, which meant that retirees could withdraw their funds fairly tax-efficiently instead and then either spend or invest them as they chose. Stellar stock market returns often made annuities seem like a poor option, since their income is largely derived from slow and steady yields from Government bonds. However, recent gyrations in the Gilts market and so higher yields meant that annuities came to look far more attractive again – with tens of thousands of pounds available over the lifetime of certain deals. So, which is the best option for retirees with significant pension pots?
The appeal of annuities is easy to understand in their offer of a guaranteed income for life, and proponents often emphasise how they can deliver freedom from worrying about stock market performance and associated risks. However, they are inflexible and have long been criticised for perhaps not always offering true value for money (and sometimes very poor deals indeed). The income and capital growth available via an investment portfolio may have looked very much better.
The good news is that the choice need not be binary: those approaching retirement do not have to limit themselves to a modest yet guaranteed income via an annuity alone. For instance, they might choose to do this with some of their savings pot to ensure that their living expenses are always covered, and then implement a pension drawdown strategy whereby they access some of those funds as income, but leave the lion’s share invested in order to still benefit from investment gains over the years. This is an approach many advisers advocate.
This mixed methodology is a popular “best of both worlds”, but the exact blend of annuity product(s) and investment strategy which is right for you will be an intensely idiosyncratic one. As ever, everything depends on your circumstances, time horizon and risk appetite. This is one area where professional advice is absolutely crucial before any big decisions are made.
If you would like to learn more about your options pre- and post-retirement, or even if you have decades yet to go, get in touch – it’s never too early nor too late to make a huge difference through implementing a better plan. Or, if you already feel ready to hear from leading providers themselves, take just a few minutes to carry out your wealth manager search today.