With the imminent arrival of new pension rules providing you with complete control over your pension pot, now may be the time to consider the main options available upon retirement. All have their advantages & disadvantages.

Annuities

These financial products are designed to provide a guaranteed income for the rest of your life in exchange for a lump sum of money.

Pros

  • Guaranteed known income for the rest of your life
  • Option to have a joint policy so that your partner can keep receiving the income after your death or vice versa
  • Option for the income to increase at a fixed rate or in line with inflation
  • Option for enhanced rates. If you suffer certain illnesses you are guaranteed a higher income rate even if you survive for a long time

Cons

  • Potentially costly. Rates are low due to current government policies
  • Loss of capital. No money will be left for inheritance
  • Inflation linked policies are based on the general rise in prices. These may not be in line with your specific living costs. As a result, in real terms, you may feel poorer in later years
  • Non inflation linked policies can quickly lose their buying power, again making you poorer in later life. If costs rise 3% per year, in just over 22 years your buying power will have halved
  • Inflation linked policies can give a much lower initial income than fixed rate annuities

Purchase properties

The purchase of properties to generate income from rent thereby covering your living expenses

Pros

  • Potential for decent long term returns
  • Income received from the properties should increase over time
  • If the income provided covers your living expenses then the house(s) can be passed on as an inheritance

Cons

  • Tax inefficient. Removing money from a pension is subject to paying income tax. Also, if the property is buy to let then income generated is subject to tax as is any gains made from selling the property later
  • Maintaining the property may prove expensive and/or time consuming i.e. paying someone to rent it on your behalf, covering unexpected bills, dealing with problematic tenants etc
  • Income may not increase sufficiently to cover your future income requirements. This may force you to sell one or more properties over time
  • Money may run out before you or your partner dies

Income withdrawal from pension

Pros

  • Potential for decent long term returns
  • Tax free gains accrue whilst the money is invested
  • Ability to minimise tax liable on withdrawals
  • Ability to pass wealth to future generations tax efficiently on death. This includes passing wealth within the pension “wrapper” allowing heirs to benefit from tax free gains as well

Cons

  • Returns subject to investment performance
  • Investments may disappoint
  • Money may run out before you or your partner dies

Re-invest income from pension into other savings accounts

Pros

  • Access to investments not available within a pension thereby potentially receiving a higher return. Higher returns come with higher risks and performance may therefore disappoint

Cons

  • Loss of tax wrapper, thereby gains made may be less due to being taxed at a higher rate
  • Investment performance may disappoint
  • Money may run out before you or your partner dies

Above are the main investment options when you retire. One key point is that pensions no longer require you to purchase an annuity (income for life). There is therefore no guarantee that your pension will outlive you. To give you a better understanding please visit our pension withdrawal guide.