What are the options for retirement income?

In the last five years, we’ve seen a massive shift in the way that people are taking retirement income. Back in 2015, pension freedom was brought in, which gave people a lot more flexibility as to the way they access their pensions.

Traditionally it was the case that you either looked at an annuity model, which provided a guaranteed income for life but was quite inflexible, or you had capped drawdown, which meant you could draw down up to a certain level of income from your pension pot, which generally offered a lot more flexibility. Pension freedom scrapped all of that.

Effectively, now we have the option where you can still take an annuity if you want a 100% guarantee of what your income will be.

You can opt for flexible access drawdown, which means you can kind of dip into your pot as much or as little as you need. That carries the risk that if you take too much, you might exhaust the pot and run out of money.

Also, the actual freedoms did provide people the option to fully withdraw their pension pot, but, of course, that then doesn’t provide any income and it’s how you would then look at generating income from those funds.

What’s the most popular option at the moment?

This is a report from 2020-2021 by the Financial Conduct Authority. In that report, there were 596,080 pension pots that had been accessed, which 13% of people had taken annuity.

30% had gone into a drawdown arrangement.  4% had entered into a drawdown arrangement where they’d opted to take tax free cash only, but weren’t taking income.

55% of people had actually fully withdrawn their pension pots, which is just staggering given that your pension pot is obviously there to provide you income for retirement.

Are people aware of the tax implications on taking it all out?

Certainly there’ll be a percentage that are. A lot of people that had actually fully withdrawn their pension pot hadn’t looked to seek any advice prior to doing so.

To give you kind of a bit of an example, if you are still employed and earning a salary and, let’s say, your income was £20,000 a year, you have a pension pot of £50,000 and you decide, right, I don’t like pensions. I can’t access the money, doesn’t feel like it’s mine. I’m taking it all out, which is generally the thought process of quite a few people that take this route.

The actual tax that you would pay on that £50,000 pension pot would actually be a figure of £9,000, which, to us, is a staggering amount of tax to pay.

It’s then a case of what you do with that money. If you then take that £41,000 and stick it in your bank earning 1%, is that actually a good way to make your money work for you?

Why are so many people not seeking advice?

Certainly, some people don’t necessarily value their pension and appreciate that it’s there to provide that retirement income.

Some people don’t like the idea of having to pay for advice in order to access their money.

Personally, if it is a case that you’re not taking advice, not understanding the implications, not looking at actually if you draw all that out, is it going to leave you in a position where actually you have no money to live in retirement?

That points towards the value of advice and making sure that such a big decision is not taken lightly.