5/1/08Planning for your longest holiday...

There are two critical components of planning for retirement: making sure that you have an adequate fund in the first place; and using it in the most appropriate way.

According to recent data from the Association of British Insurers (ABI), almost one third of those currently in work save nothing towards a pension. A further one in seven do not save enough; in fact fewer than half of all those at work currently save enough towards their retirement.

The ‘shortfall’ identified by the ABI is based on research indicating that while roughly four out of ten people want to have a retirement income of between a half and three quarters of their current level of income to retire in comfort, only a quarter expected to do so, based on current saving levels. Yet more than half of all respondents said they expect their pension (including state benefits) to be their main source of income in retirement. A third expect to rely on inheritance, property or their partner’s income in retirement.

Actually, the belief that even as much as 75% of ‘final earnings’ will prove an acceptable retirement income could be outdated. With people retiring in far better health than a generation ago, it is not just that people live longer, but that they expect to be more active in the early years of retirement and this creates the need for income.

If you have more leisure time, you could well spend more, not less, than before; so having a generous income to pay for all your leisure activities could be important. Not to mention the need to have spare income to help the next generation cope with the demands of modern life!

So planning for the largest fund you can is very important. But it is also vital to ensure that the fund you have built up while working produces the best possible income for you later on.

But this may not mean the largest immediate annuity you can find; after all, many people today make a gradual transition from working to retirement. As a result, you may wish to draw a smaller amount immediately, but then increase your income later on.

You can achieve maximum flexibility by using what is called an ‘unsecured pension’, commonly known as drawdown. This enables you to take up to 25% of the fund immediately as tax free cash and then to draw an income directly from the fund. Your income can be anything from nothing at all, up to 120% of the annuity that a single person of your age and gender could purchase, based on rates issued by the Government Actuary’s Department.

This can last anything from age 50 (rising to 55 in 2010) right up to age 74. Beyond that age, you must use an ‘alternatively secured pension’, which is also drawn directly from the pension fund, but with different limits. The treatment on death is also very different and you should ask us for details.

In many cases, it will be appropriate to purchase an annuity at some point between initial retirement and age 75. This will also require advice, since you can usually use what is called an ‘open market option’ to buy your annuity from a company other than the one with which you built up the fund.

Preparing for retirement is something that should be done as early as possible, giving your money as long as possible to grow in the tax favoured pension environment. There are, however, alternatives open to most investors and we can guide you through these.