The problem with planning for retirement is pension savers think more about products than outcomes and often lock themselves in to unsuitable financial strategies.
Pensions have worked for previous generations because they have not had to fund such long retirements.
The choices are simple –
- Take an annuity to give an income for life
- Consider drawdown to better manage retirement finances if you have other sources of income
That was fine until falling low interest rates, tumbling gilt yields and economic turmoil gripped the world economy and when coupled with inflation, gave a meagre return on pensions and investments.
Now, the thinking is more about lifestyle and spending patterns than buy an annuity or go for drawdown.
Invest in an annuity to cover day-to-day bills and supplement one-off spending from drawdown, like a holiday, home improvements or cash gifts to loved ones.
Going for a retirement combo is more likely to provide the cash needed to fund a comfortable retirement than taking risks with a single investment, argues Ray Chinn, head of pensions at LV=.
“People think with annuity and drawdown products that it is one or the other, but it is a mix,” he said.
“People need to look at what they want. What income level do I need to cover my day-to-day costs? With the rest of the money look at how much can you can afford to have in the market. Can you find a nice home for your money that will provide some drawdown income?
“If you have the means in your pension fund secure a basic annuity and then build off that.”
Another option that comes with some risk is a fixed term annuity. Many retirement savers are opting for these schemes for five or 10 years in the hope that their capital is safe while annuity rates and investment returns will have time to improve.