My mother has been a widow for many years. She is about to retire and is worried about the decisions she needs to take regarding her personal pension. The information she has read suggests moving it into a drawdown contract, but she is concerned about this: whether the money might run out and what would happen if the stock market crashed, for example. Can she still just buy a regular income with her fund? It’s worth about £280,000.
Phil Beck of Smith & Pinching responds:
Yes, it is still possible to use pension savings to buy a guaranteed income for life. This is called an annuity and is a contract purchased from an insurance company using the fund your mother has accumulated.
The advantages of an annuity are the guaranteed nature of the income and the lack of involvement needed once the contract has been set up. However, annuity rates are quite low at present. Annuities have limited flexibility once they are set up: the decisions made at the outset, such as income levels and spousal benefits, cannot generally be undone. However, it is possible to include increases in income in line with inflation and some protection for heirs if your mother were to die during a guaranteed period after taking out the annuity.
The other factor to consider is market volatility: low market values may have an impact on the amount of pension available to buy an annuity. This means your mother may get better value for her pension savings from an income drawdown contract by only taking what she needs, when she needs it.
Income drawdown involves taking an income directly from invested pension savings, leaving the remaining fund invested for future growth. Major benefits of income drawdown are the ability to change income levels at different stages of retirement and the possibility of leaving unspent pension to heirs. However, it does entail some responsibility for your mother to ensure that the investments are performing as expected over time and that her withdrawals are managed to ensure their sustainability throughout her life.
I suggest you and your mother meet with an independent financial adviser to talk through the options. On paper, income drawdown may seem the better value, but for some people annuities still have their place, particularly for those who want the security of a fixed income and to avoid market volatility.
Any opinions expressed in this article do not constitute advice. The value of an investment and the income from it could go down as well as up. The ultimate return is not guaranteed and you may get back less than you invested. Pension income could be affected by interest rates when you take benefits. Levels, bases and reliefs from taxation may be subject to change.
For more information, please visit www.smith-pinching.co.uk
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