Complex choices to be made when you retire

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Since 2015 many people who are eligible have taken advantage of pension freedoms.

This has allowed them to access the whole of their pension fund without the requirement to buy an annuity.

Kieron Bassett

Kieron Bassett

This innovation caught the industry by surprise with specialist annuity companies struggling to survive as demand for their product almost disappeared.

However, pension freedoms are not for everyone as they do generally carry elements of risk for those leaving their funds invested, with or without withdrawals being made. For people who have no risk appetite, or who cannot afford to take any risk, then annuities still have their place. This category of pensioner needs to be aware they do not need to buy their pension from their existing provider, but can shop around for the best deal. Also pensioners who have health issues or particular lifestyles which include smoking or even working in a factory for most of their lives can access a bigger pension. This is because companies providing the annuity believe they have a smaller life span than the average person of their age so they are prepared to pay more.

Although the market for annuities remains it has been much reduced by the recent reforms, but the providers are fighting back with new products. These include offering up a 30-year guarantee on pensions. This means if a pensioner dies early in the contract a money back guarantee allows the pension to be paid up to a 100 per cent of the amount used to buy the annuity minus any income payment already made.

A working example from Retirement Advantage shows a male 65 year old buying an annuity with a £50,000 pension pot. The annuity paid is £2,554 per annum but if the man dies after just one year the total amount paid out is £76,300 (based on income continuing to be paid out over 30 years).

This type of plan replaces the five and 10 year guarantees which were available before pension freedom, and help us to overcome the objections people had in the past regarding annuities that if you die early the company wins. Pension simplification has given people more choices of what to do with their pension funds at retirement.

But I believe it has overall made retirement choices more complex. This is why it is crucial to consult with independent chartered financial planners to guide you through the maze.