15 Dec 2011

Choose the right road for your retirement

Choose the right road for your retirement

Duncan Mellis, Financial Adviser gives advice to those nearing retirement and those currently utilising income drawdown from their pension funds and provides a reminder of the benefits offered by this type of retirement planning.

Duncan Mellis, Financial Adviser gives advice to those nearing retirement and those currently utilising income drawdown from their pension funds and provides a reminder of the benefits offered by this type of retirement planning.

Income drawdown has been reported in the press quite a lot lately on the basis that many pensioners who entered drawdown now face the prospect of reduced income as their plans come up for review.

The rule changes in April saw the abolition of the effective obligation to buy an annuity at age 75 while drawdown was restricted to 100% of the equivalent annuity rate rather than 120% under the former unsecured pension system.

Flexible drawdown was also introduced to allow anyone who can demonstrate that they have a guaranteed lifetime income of £20,000 a year to take unlimited sums from their drawdown pot.

In August 2011, the FTSE fell heavily  and continued market volatility has clearly taken its toll on pension savings and also on future income on cases that are due for review.

With so many changes it is easy to lose sight of the many benefits of income drawdown.

Although not without risk there are many who appreciated the flexibility offered, investment options and death benefits drawdown provides over the years.

Current stock market volatility combined with historically low annuity rates and rising inflation has given those approaching retirement some difficult choices.

In this environment, it is perhaps not surprising that there has been increased interest in drawdown.

By leaving their funds invested, there is a chance of clients benefitting from future investment returns and more attractive annuity rates in the future.

To what extent the rule changes are influencing this decision is hard to say. The rule changes have made income drawdown a more flexible option that before but many fundamental benefits have remained the same.

Control of underlying pension fund income, timing of annuity purchase and payments of the residual fund – minus tax – on death remain the key drivers of this market.

As the markets look set to remain volatile for some months to come, it seems likely that interest in income drawdown will remain strong as increasing numbers of people seek ways to mitigate their pension fund losses.

Whether this strategy pays off for savers in the long run remains to be seen but for many the prospect of locking into a lifetime annuity at historically low rates, right now is unappealing.

The importance of seeking independent advice to look and discuss all the options cannot be overly stressed.

Duncan Mellis, Financial Adviser


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