Traditionally taking your pension
meant buying an annuity, which provided you with a guaranteed income for life.
The level of income you could expect to receive was determined by the state of
the market at the moment you bought it (and the value of your ‘pension pot’),
and prevailing interest rates. Clearly
to do that now would be a double whammy; buying an annuity based on
historically low interest rates, when the value your pension pot is likely to
have been impacted by the Covid crash, is unlikely to give good returns.
Thankfully, following updated
pension legislation which took effect in 2015, which allowed greater access to
pensions, there are now other options. Purchasing an annuity is now optional,
but if you have a Flexi-Access Drawdown pension, you can simply draw an income
directly from this. Those who need to draw from their pension pots can draw the
funds the need, leaving the rest invested with the hope of a market bounce when
(if?) a vaccine becomes available.
An even better choice for those who
can is to use existing non-pension savings for income in the short-term, as
these are not likely to be earning much interest anyway. That way, you can leave your tax-efficient
pension intact and invested while you wait for the markets to recover. This also has the advantage of reducing your
estate for any potential inheritance tax liability, as savings are counted as
part of the estate while pensions are generally not.
Most people view their pensions as
a source of retirement income and their savings as something for a rainy
day. Well, if the Covid pandemic doesn’t
count as a rainy day, you will probably never need an umbrella!
The third option is to review
whether now is the right time to retire at all.
Whilst most of us have a firm date to stop work in our minds, there is
nothing to say you must do it at a specific age, and events such as those which
have knocked us all sideways this year demand a certain flexibility. Staying working for another six months means
half a year more salary, a shorter period that your pension will eventually
have to fund, and it gives your pension pot a chance to recover from the
short-term Covid shock.
Whatever you choose, it is more
important than ever to review your pension provision before making any
decision. Given the current volatility,
you may want to reconsider your attitude to risk. If you took your pension out before 2015, you
may need to convert it to a Flexible Access Drawdown Pension in order to be
able to draw down funds flexibly – this is not a complex process, but is best
achieved with the help of a professional adviser.
