Planning for retirement is no longer a ‘one-and-done’ decision

Chris Pitt, IRESS head of market analysis, says different financial products are increasingly coming into their own at different stages of retirement. Two years on from the introduction of pension freedoms, the way we fund our retirements is changing. Research from financial software developer IRESS into how people are now using their pensions savings tells us there are now several phases to retirement and the amount of income we need changes over time. Ensuring there is enough money at each stage means planning your finances for retirement is becoming more complex.

Before pension freedoms, when most people retired they used their pension pot to take out an annuity and the guaranteed fixed income generally met their financial needs for the rest of their life.

But how we live in retirement is changing: we want to stay active and enjoy life, we may need to help our children and grandchildren financially, and we’re living a lot longer. There are now several phases to retirement and the amount of regular income we need changes over time.

In the early years of retirement, you may now be paying off mortgage debt or acting as the ‘Bank of Mum and Dad’ to help your children with university fees or house deposits. However, encashing your pension fund in full at retirement, or using it all for drawdown to meet ongoing financial commitments, creates a risk of running out of money or having an income that fluctuates.

Using some of a pension fund to buy a fixed income annuity that provides a guaranteed income for a set number of years (often five or ten), to help cover any regular payments that continue in early retirement, could be a useful alternative to cashing in the whole fund.

While it may seem strange that a fixed-term product can help provide flexible retirement income, it is a growing trend. Fixed-term annuity quotes now account for almost a quarter of all those we produce, up from 15 per cent at the end of 2015, and the 55-69 age group accounts for 92 per cent of all quotes generated. Ensuring you have a guaranteed minimum level of income is increasingly seen as a practical option for servicing fixed-term financial commitments in early retirement.

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As people get further into retirement, equity release, which allows over-55s to tap into the value tied up in their home, is experiencing significant growth as a way of providing additional income.

The volume of equity release comparison quotes produced by our systems was up 34 per cent in June 2017, compared to a year ago. The average age of the homeowner is 69, indicating that equity release is seen as an option for those beyond the initial stage of retirement.

The average loan is worth about a fifth of the value of the property, with more than half of new plans being taken out in the form of a drawdown arrangement. It seems equity release is increasingly used as one part of a wider plan to generate income in the mid-retirement phase – perhaps to top up other sources of income so as to either delay using pension funds to buy an annuity, or to keep funds invested for longer.

At later stages of retirement, ill health may become an issue and being certain about the level of money coming in can become more important. Delaying buying an annuity until this stage may be a sensible decision because enhanced annuity rates, which offer a higher guaranteed income to those with medical conditions, may then be available.

We’re seeing over half of annuity quotes produced now include some medical and health information, so it seems awareness is growing of the importance of full medical history disclosure when shopping around for an annuity. Being honest about even non-serious medical conditions and other factors like being overweight or smoking, can make a real difference to the income you receive in return for your pension pot.

Retirement today is a journey and not a destination. Although sustainable retirement income remains a core priority, ‘sustainable’ does not necessarily mean life-long. Planning your retirement finances isn’t a ‘one and done’ decision anymore, it’s an ongoing process.

There are now more flexible options to help generate income to meet your needs as they change over time. But greater choice may also mean decisions are more complex and it may be worth taking financial advice to help choose the path that’s best for you.

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