When dealing with saving for retirement or utilizing your pension to last, there are always the issue of the funds/pot not lasting throughout your retirement and that of what happens to the rest of your retirement funds if you die before using them up.
Sometimes, these two issues are in conflict. If you decide to pursue solving the former, the latter could happen, and vice versa. The big question is: what then do you do to secure your retirement funds? According to Larry Klein, a retired financial advisor and a publisher at Retirement Income, having the right information and weighing your options properly are essential to securing your savings or investments against an uncertain future.
In the case of securing your retirement funds, here are five options to consider:
An Annuity with a Guarantee Period
While taking out an annuity with your pension can ensure that your retirement income lasts throughout your retirement, if you die early, the money will go to waste, unless your annuity has a guarantee period.
When you have a guarantee period, you get the assurance that your retirement income will be paid out for an agreed number of years starting from the time you bought the annuity, and it doesn’t matter if you die along the way. This means that if your annuity has a guarantee period of 10 years, you dying 3 years after taking it out will not stop the payment. Instead, the payment will pass to your beneficiary or partner who will then continue to receive it for 7 more years.
Guarantee periods usually ran for five or ten years, until April 2015 when new rules were introduced, extending the span to however long you want it to last. It’s worth noting, though, that the longer a guarantee period, the smaller the income you receive.
An annuity with a guarantee period is the ideal way to secure your retirement funds if your life expectancy is short—that is, it’s highly unlikely that you will outlive the guarantee period.
Value Protection
Also called Lump-sum death benefit or capital protection, this option isn’t as popular as a guarantee period, but is worth considering when looking to secure your retirement income. Should you die before using up your annuity, it ensures that your beneficiaries or estate will get, as a lump sum, the reminder as well as ‘the gross income from your annuity before you passed’. However, it can translate to your retirement income being lower than when you buy an annuity without value protection.
Seek Financial Advice
Unless you are on the defined benefit scheme, where your retirement income is based on your final salary and the number of years you worked for your employer, you will probably be saving up your retirement funds in a pension pot. This means that you will have to decide how to utilise your pension so that it can last throughout your retirement.
Here are the options you have based on the April 2015 rules:
- Leave your pension untouched so that it can continue to grow until you need it later in your retirement.
- Use your pension to purchase a life annuity.
- Take 25% of your pension as a tax-free lump sum and reinvest the rest into funds developed to offer you regular taxable income.
- Withdraw your pension in small sums with 25% of each withdrawal being tax-free.
- Collect your whole pension as cash.
- Mix your options.
With this many options, deciding how to utilize your pension pot can be daunting. And that’s why you need a financial advisor to guide you so that you can properly secure your funds to last throughout your retirement.
Self-Invested Personal Pension (SIPPs)
Whether you are a salary earner looking for an alternative pension option, a self-employed looking to secure their retirement, or a retiree looking to invest their pension to last and if not exhausted when you die, pass to a loved one, a self-invested personal pension is another great option. With SIPPs, you get more control over where and how your retirement funds are invested. Learn more about self-invested personal pensions here.
Individual Savings Account
The great thing about an ISA is that, unlike other savings account where you pay income tax on earned interest, it’s a viable tax-free way to invest or save towards your retirement. While it may not be as powerful as pensions, it is a great way to prepare for your retirement when you don’t have a pension or need an alternative means.
Best of all, your retirement funds do not waste when you die. They can go to a beneficiary you elect. However, while civil partners and spouses can benefit from the tax advantages associated with an ISA, other family members (even children) and unmarried partners can only inherit the assets with the ISA (shares and cash) and not the tax break. Learn more about ISAs here.
As an ending note, whichever one of the above mentioned options you choose, it’s recommended that you always combine it with the third option—that is, ‘seek financial advice’. It’s always important and will improve your chances of ensuring that your retirement funds are secure.
