Until April 2015, retirees faced a fairly stark choice with their pensions. The majority turned their lifetime savings into an income for life by buying an annuity. But then along came pension freedoms, and retirees now can do as they wish with their pensions
This leaves retirees with a vast array of options, from taking chunks in cash as and when needed to staying invested and drawing income, or simply blowing the lot. Of course, it is still possible to stick to the traditional route of buying an annuity offering a guaranteed income.
“The pension freedoms have proved very popular. But with choice comes personal responsibility,” says Steven Cameron, pensions director at financial provider Aegon.
Moneywise speaks to people who have relished the chance to do what they want with their money and choose different retirement options.
Lee Hines (pictured directly above, with flowers), 73, a retired journalist and PR consultant, was about to take out an annuity when the pension rules changed.
“I thought I would have to follow my husband’s lead and hand over my nest egg in exchange for an annuity,” she says. “I was out in the garden when the pension changes were announced, and my husband rushed to tell me the good news – we danced up and down among the rose beds.”
Lee lives with husband, Peter, 72, in Newent, Gloucestershire, where they downsized from their London home. They aim for a combined pension income of around £50,000 a year.
“We don’t have children and like travelling a lot. We are patrons of the local theatre, so we spend a fair amount on that too.”
The couple love natural history and say one of their best trips was to the Galapagos Islands.
"I was out in the garden when the pension changes were announced, and my husband rushed to tell me the good news – we danced up and down among the rose beds"
Peter, who ran a printing company, had managed to secure a decent annuity, principally because of ill health but also because he bought it before rates plummeted. The couple also have some cash in savings accounts, set aside from selling their previous home.
“But as I was approaching 70, I thought I should take out an annuity – and I had a good pension pot,” says Lee. “Rates were poor, though, and I was going to have to spend a lot to get the £20,000 a year I was aiming for.”
Following the introduction of the pension freedoms, Lee decided to set up an online flexible drawdown plan with Hargreaves Lansdown.
This allows her to take lump sums or income out of her pot as and when required.
“So I’m staying invested, and it’s very easy to manage online. If I need some money I can work out how much I can withdraw, without going into the higher-rate tax bracket,” she says.
As she has a secure grounding in the stock market, Lee is confident managing her pension in this way.
“I follow the rules, such as not putting it all on one horse, but spreading it around, and I use the online tools to help me,” she adds.
Nick Dunn used his pension savings to invest in a home
Getting back on to the property ladder was a retirement goal for driving instructor Nick Dunn, 63, from Berkshire.
“I had owned before, but I hadn’t been on the ladder for about 20 years while I was living with my girlfriend,” he explains. “She owned her flat, so when we split I had to look for a way to rent or try to find a home of my own again.”
He heard about shared ownership, which enables buyers to part own and part rent a property. This is a cheaper way to buy a home, and because of Nick’s self-employed status and his age he would have struggled to get a mortgage. A few years ago he began gradually cashing in what personal pension money he had built up. He used this, along with an inheritance, to buy a 65% share in a two-bedroom flat for £183,625 in Bracknell. His monthly outgoings for his home are £259 for the share owned by Thames Valley Housing and £129 in service charges.
"I’m very happy to have been able to buy a home, as it was something I didn’t think would be possible – it was quite an emotional decision"
“I’m very happy to have been able to do this, as it was something I didn’t think would be possible – it was quite an emotional decision,” he says.
Nick is hoping to set up his own business and take on a more managerial role in future to work and save towards his pension. “This way, I can hand out the work to trusted driving instructors and potentially earn more money,” he says.
“After a difficult year of adjustment, I am happy with ticking along, and I keep active and fit. I have lots of hobbies, including fly fishing and golf, and I’m learning philosophy. I will create a pension through a business venture linked to my current and past skill sets. Although life has presented some challenges, I’m happy for the future,” he says.
Vivian and Christopher Kelly have taken full advantage of the pension options open to them
Christopher Kelly, 61, a retired account manager for a security firm, was pleased that the new rules enabled him to “pick and choose” what to do with his pension pot, but he still opted for an annuity.
“I was one of a lucky few offered a guaranteed annuity rate, and it would have been foolish to turn it down,” he says. Many personal pensions, particularly those sold before 1990, offered guaranteed annuity rates far higher than those on offer today.
He and his wife, Vivian, 62, have secured an annual income of around £8,500 a year from their annuities, and a small sum from an armed forces pension. “This may not sound much, but without a mortgage and with minimal bills for our three-bed semi, we’re quite comfortable,” he says.
They also have around £75,000 saved in cash, most of it in NS&I Premium Bonds, that they dip into for treats and on special occasions. “One of my personal pensions was worth about £60,000, and I get about £420 a month from this at a rate of 8.3% – you would never get that now,” says Christopher.
They have installed photovoltaic solar panels on the roof of their home to benefit from the feed-in tariff. “This cost about £9,000, but we receive about £150 a month, so it’s well worth the cost. My advice to anyone retiring is to think about different ways to produce an income,” he says.
Christopher drew the maximum 25% tax-free lump sum from his pension to pay for a knee operation for Vivian and laser eye surgery for his twin daughters, aged 32. “This was worth every penny, as they’re delighted that they no longer have to wear glasses,” he says.
Once Vivian is fully recovered from the operation, they plan to do some travelling. “If we need more cash in the future we can sell the house and downsize,” he adds.
Nick and Marion Wallbridge, from Amersham, Buckinghamshire, are big fans of the pension freedoms as they have been able to spend more in what Nick calls the “bubble of retirement”.
“This is early on in our retirement. Later on, we will slow down,” he says. “I can access our funds to withdraw what I want, when I want it.”
Nick, 56, who still works as an IT consultant, and Marion, 62, a retired civil servant, aim to fully retire in around four years’ time. Nick is quite comfortable dealing with the stock market and has educated himself over the past few years, so he is able to keep his pension invested.
“This will allow us to fund what we want to do in retirement,” he says.
"My advice to anyone retiring is to think about different ways to produce an income"
This flexibility has enabled him to semi-retire earlier than he would otherwise have been able. “It suits our family circumstances, as it allows Marion and I to spend more time together earlier on when we are both relatively fit and healthy.”
Over the next decade or two, they hope to pursue their equestrian interests, as they have three horses. They used to event, but now Marion focuses on dressage. Nick is a coach and trainer, which also provides an income stream. He may also choose to pay for a hip operation with a portion of his pension, rather than wait for the NHS to do the operation.
“I can then recuperate at my own speed, without the pressure of rushing back to a full-time job,” he adds.
“I have produced a financial plan and modelled different scenarios,” he says. At present, the couple aims for an income of around £45,000 a year, which would cover the cost of the horses,” Nick explains.
“I have a good handle on the plan in terms of the investment returns, what our expenditure will be in retirement, the cost of our horses and when we will pay off our mortgages.”
Nick took advice from a financial planner at Charles Stanley. “A second pair of eyes reviewing my plans gave me comfort,” he says. The couple plan for an income drop to about £35,000 over their first 15 years in retirement and then a fall to about £25,000.
However, they still fear running out of money. “That’s if events outside of our control, such as Brexit, impact the plan,” he says. “The other main concern is that our health fails and we can’t do what we plan to.”
Eight steps to an optimal retirement plan
- Consider the retirement lifestyle you are planning to have. “Your income needs will depend on whether, for example, you plan to move abroad, downsize, move closer to family or spend six months of the year travelling,” says Danny Cox, a financial planner at Hargreaves Lansdown.
- Continue to save. The more you save and the longer you do so, the bigger your pension pot and income will eventually be.
- Join your company pension. Otherwise, you may be missing out on valuable employer pension contributions.
- Make the most of government giveaways. For every £100 you save into a pension, you will get a £25 boost from the government. Under-40s can also save into a Lifetime Isa to get a 25% bonus worth up to £1,000 a year, which can be used towards retirement from age 60.
- Retirement planning isn’t all about pensions. “Pay off all your debts and build a cash safety net in a Cash Isa so that you have money for emergencies,” says Mr Cox.
- Don’t rule out staying invested. You could be retired for a long time, perhaps many decades, giving you plenty of time to invest in the stock market and potentially benefit from greater returns.
- Check for benefit entitlements. The charity Citizens Advice can check if there are any you should claim. You can also check what benefits you might be able to claim at Gov.uk/benefits-calculators.
- Consider your possible long-term care needs very carefully. Most people have to fund their own care costs if they don’t want to rely on local councils, which provide the bare minimum of funding. In England, state support only kicks in when the value of a person’s savings and property falls below £23,250. Weigh up all your options.
Take advice to avoid pitfalls
Pension freedoms have opened the door to more choice for people approaching retirement, but this means it’s more important than ever to make the right decisions. Make the wrong calls and you could run out of money.
Several free guidance services are on offer. If you are looking for free guidance on pension planning, you could speak to the Pensions Advisory Service (Pensionsadvisoryservice.org.uk), on 0800 011 3797, or the government’s Pension Wise service (Pensionwise.gov.uk) on 0800 138 3944. The Money Advice Service (Moneyadviceservice.org.uk) offers tools to work out how much income you will need in retirement.
However, if you want professional advice where recommendations are tailored to you, you’ll need to pay for it. You’ll be charged an upfront fee, typically £150 an hour, or a charge based on a percentage of the sum invested.
A list of independent financial advisers who are retirement specialists is available from the Pension Income Choice Association (Pick-a.org.uk). The Society of Later Life Advisers (Societyoflaterlifeadvisers.co.uk) offers guidance on retirement planning and long-term care considerations. You can also find retirement advisers in your local area at Unbiased.co.uk.
Marion and Nick Wallbridge opted for active semi-retirement
Beware of cashing in pensions
Remember that pension savings aren’t tax free. When you withdraw more than the 25% tax-free lump sum, you’re taxed at your personal rate on the additional sum. So if you take £150,000 as a lump sum from your pension, you’re taxed as if you earned that in a single year. This risks a hefty bill. Bear in mind that you can’t get this money back at a later date.
Anne McClean, a financial planner at Charles Stanley, says: “Right now, there is plenty of evidence, not least from government tax receipts, that retirees are paying more tax than they need to. They might, for example, have withdrawn their entire fund in one go and put themselves into the higher, or even the additional-rate tax band, rather than withdrawing what they need over a period of time.”
Ideally, your pension is meant to provide sufficient funds to give you a lifelong income when you stop work. If you take a large lump sum out or withdraw the lot and aren’t careful about how you use this sum, you could use up all your hard-earned cash and have nothing left to live on.