Retirement Choices

Now more than ever before, retirement brings with it an array of choices, some of which will not be appropriate for some people but all of which can be confusing at what is one of the most important times of life for financial decisions.

What does Retirement Mean?

Until recently retirement tended to be interpreted as stopping work and replacing income previously received from employment with income from either, or both, of the State and Private Pension provision.

However, since 2006 it has been possible to continue working and start to receive your pension income and so retirement can now mean one thing with regard to stopping work and something completely different with regard to accessing pension benefits.

Many people now either transition their movement from full time employment to retirement, or continue to work part time past their ‘normal retirement age’ while receiving some of the pension income due to lifestyle or affordability choices.

With employers now unable to operate Default Retirement Ages, and with life expectancy in retirement continuing to increase, the mixing and matching of part time employment and receiving pension income is likely to become even more popular.

What could Retirement from a Pension Plan offer?

There are many options for most people when it comes to taking benefits from their private pension plans.  This is good news as with so many options, there truly is an appropriate solution for everyone.

The initial choice facing most people is whether to take just a regular income from their pension savings or a combination of a Tax Free Lump Sum and a reduced income.  For most current pension savers, 25% of the fund is available as a Tax Free Cash lump sum. Different rules and limits do apply though, so the amount will depend on the pension plan. For Defined Benefit scheme members, taking cash may mean giving up a lot of pension income (so in these cases, check the conversion rate applied by the scheme – it may be better value to take all the benefit as income).

To make the most of the choices available, it is extremely important that anyone looking to take their pension benefits seeks Independent Financial Advice.

What Retirement Income Options exist?

The options available to an individual will differ depending on the type of pension plan that has been saved into.  For example, there are relatively few options available under Defined Benefit schemes, where individuals tend to receive a scheme pension for life, i.e. an income paid from the scheme, while with Defined Contribution schemes many options may well be available.

With Defined Benefit schemes there is likely to be little choice available to the individual with regard to the level of income they receive as the amount, frequency, escalation and dependents benefits associated to the payment are dictated by the scheme rules.

However, under a Defined Contribution scheme, all of these are normally able to be decided by the individual. The individual also has the power to decide on whether their annuity (income) is paid by the insurer who they have saved with, or any other provider – this is important as different providers pay out different income rates, so shopping around can add extra money throughout retirement at no cost.

If not in perfect health it is possible to receive an Impaired Life Annuity, where the income is paid at a higher level as the individual is not expected to survive as long in retirement as may otherwise have been the case.

The frequency of payment and whether the income increases each year also become variables able to be decided by the individual and different people will want or require different options on these topics. In a similar way, some people will want the income from their pension to continue to a dependent on their death, while other individuals will be single and so not require such provision.  Again these choices exist under a Defined Contribution scheme.

Finally, for some people the taking of Tax Free Cash will be all they want to initially do on retirement, or they may not want a regular income stream and prefer to receive income as and when it is required.  For these people Drawdown Pensions, allowing the individual to dictate how much income is received and how often, within minimum and maximum limits, are a great option.

And then there are the State Benefits to Consider

On top of all the confusion that could exist for an individual with the above is what they are likely to receive from the State.  With the Basic State Pension, the Graduated Pension Scheme, the State Earnings Related Pension, the State Second Pension as well as Means Testing, with the Guarantee Credit and Savings Credit, this is another area which for most people is potentially very confusing at a time of their life when clarity and certainty are required.

It is for these reasons that anyone looking at retirement should start to plan years in advance, not months or days, ensuring that they take Independent Financial Advice on the options available to them and the expectant level of retirement income they would receive.

Creative Benefits is a specialist employee benefits consultancy. We are experts in all aspects of workplace pension and the associated retirement options. Our services help employers to provide employees with pensions and other benefits. Where appointed to provide independent financial advice to employees, we have dedicated Employee Benefit Advisers who give help and advise on any and all the different types