As state retirement age edges closer to 70, many people begin to wonder whether they will ever receive a state pension. Conversely, many do not want to retire.We are staying fitter for longer and retirement is almost an outdated picture of later life. Many choose to remain gainfully employed, perhaps part-time, or volunteering to the same extent.
So let us forget the word retirement. For many it is “so next year” that it will never happen. The big question is, at what age will our capital need to be turned into income to meet a lifestyle shortfall, as a result of leaving employment or from just deciding to work fewer hours.
The big decision will be how best to meet that shortfall from the range of assets, products pensions and Nisas/Isas at an individual’s disposal. That is where it gets tricky. Before pension freedoms, life was pretty simple, the pack from your insurer came at your selected retirement age and offered you an annuity. Most people just ticked it.
It is all about income. People will still retire with a pot of pension money from which they need to meet their spending goals and cover their essential budget requirements, until death. But life is not simple any more and life expectancy rates have risen. The concept of fixed retirement ages with the prospect of, or requirement for, a constant level of pension income thereafter is no longer likely to fit the majority of people for either affordability or lifestyle reasons.
Annuities have also become exceedingly expensive in this post-credit crunch, quantitative easing-driven, low-interest rate environment. All these factors will lead people to consider more flexible retirement options.
While annuities offer surety of income for life, are relatively easy to understand and largely risk-free, the major drawback and lack of reward lies in their inflexibility.
Value
With annuities, at retirement you surrender a capital value to the insurance company in return for guaranteed income for life. Many risks such as longevity and falling income, are transferred to the provider. One has peace of mind but all value may be lost at death. Annuities, unless purchased with guarantees, may have no residual value in the case of premature death.
With drawdown, the risks of longevity and falling income may mean that capital value is depleted prior to death. One needs to give serious consideration to some type of longevity protection, one’s capacity for loss and in particular the ‘sequence risk’ effect of big losses in the early phase of drawdown.
