Managing Your Pension

If you have a private pension or company pension you are likely to have some decisions to make when you retire. You will be asked whether you would like to take a cash lump sum and what you would like to do with the remaining pot. Here are two of the more common options.

Annuities

The new coalition government is currently reviewing the effective requirement for most retirees to buy an annuity by a certain age. Further details are expected to emerge in 2011, in the meantime the age limit at which the annuity must effectively be purchased has been increased from age 75 to age 77, for persons who reach the age of 75 on or after 22 June 2010.

Annuities provide a guaranteed income for life in return for the purchase price. An annuity is an insurance policy rather than a direct investment so the provider you select will be investing your money behind the scenes while paying your yield in accordance with the annuity contract. Some annuities will increase to keep up with inflation; others will pay a level amount throughout.

You cannot change your mind and switch annuity providers so it's vital to do research into your annuity options and you may wish to seek some financial advice.

Income drawdown from your pension

Income drawdown is a flexible retirement option that is usually available from your retirement date up to a certain age when for most people there becomes an effective requirement to buy an annuity. It allows you to make investments with your pension pot rather than make an immediate annuity purchase. Because of this, you can tailor your retirement assets to your investment preferences. There are risks and drawbacks in this so you should seek financial advice before considering drawdown and remember that the new government might change the rules surrounding private pension arrangements after its review. With most pension products you can start to draw benefits from 55.

Drawing an income

How you take your income is also a consideration when deciding which investments to make. Do you need the money monthly, quarterly or as and when required? Income funds will pay their income on regular cycles so you can match these to your needs.

Regular withdrawal plans

Many investment companies, understanding the need for you to take an income, offer regular withdrawal facilities. They work by paying a specified amount from your investment accounts and transferring the money directly to your bank account. If the yield on your investments is not sufficient to pay you the amount you decide you need, the withdrawal facility will sell investments

to make up the difference. This way you know you will have a regular income come

what may. Remember, however, that this may reduce the capital over time if the fund’s growth does not compensate for the withdrawals.