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Pensions are a complex part of personal finance planning. Paul Garwood discusses different ways to receive pension payments in this TV show.
When you reach retirement if you’ve got a pension plan and that pension plan is one that you’ve contributed to and has now grown into a fund, you don’t just have to buy an annuity with that fund.
And you tend to find that those with larger funds wouldn’t necessarily want to buy an annuity because it’s quite inflexible.
Once you’ve purchased an annuity, if you were to pass away very quickly thereafter, the annuity fund or your pension savings go to the annuity provider.
Furthermore when you purchase an annuity you may have to make a one-off decision regarding spouses’ pensions.
And if your spouse predeceases you, then again you’ve bought something you don’t need.
Also with annuities you may have to consider inflation at outset. And that’s quite a difficult call to make.
So what a lot of people do who have reasonably sizeable pots is they enter into income drawdown.Now, income drawdown enables them to dip into their pension plan and take out an income as and when they require it. And depending upon their circumstances, their income within that drawdown plan is capped at a specific maximum or sometimes it’s open-ended, you can actually take out as much or as little as you want from that plan, as and when you want. And the other thing to consider perhaps with less successful people or with people who I think less successful is not the right expression, but people who have got a more tighter budget when they get to retirement, they might want to phase in their tax free cash. Pension plans allow you to release 25% of the fund on retirement and historically a lot of people have used that, perhaps to pay off debt or to buy assets, notably overseas property perhaps. But I think we’re finding now that a lot more people are perhaps using that tax free cash to supplement their income. So they will phase it in over a period of years rather than taking it all in one go. __________________________________________________ Inside Finance TV are following discussions around personal planning and finance, and are releasing more videos daily.
Life expectancy is rising. Mike Fosberry of Smith & Williamson discusses successfully advising a growing number of retirees.
I think the successes are people obviously living much longer nowadays.
Longevity I think it one of the biggest issues we face economically from a family life perspective. It's a huge impact in terms of well an economic perspective in terms of things like care costs, etc.
And how do you deal with longevity?
People are, let me say, they're retiring at 65, they may have a spouse who's three years younger than them on average, that's normally the case. One of them is likely to be alive in 30 years’ time, actuarially speaking.
So that's a huge issue because their retirement life may in some cases be longer than their working life. So do you have enough money when you retire to sustain yourself through what could be a very long retirement?
And bear in mind that the latter stages of the retirement are probably going to be in pretty poor health as well. So how do you cope with that? How much money do you need to cope with that? And so we've got to get people focusing on those issues now.
Government is looking at it.
Obviously we've seen extension of state retirement age. For most people it's going to be 67 or 68, perhaps longer in the future.
That's only part of the solution the government will put to it. They can't afford to increase the amount of money set aside for things like care bills, we haven't got the money to do it.
So there's going to be a huge incentive or a huge requirement for people to fund for themselves.
And that's part of my job, making sure that they focus on those issues.
In terms of success, well we have a lot of clients who are well into retirement, in their late 80s, who seem to be surviving on the income and capital that we're able to provide them with in their retirement.
So I'm touching wood when I say this because ultimately peoples’ expenditure patterns, etc differ.
But in the main I think we've done a pretty good job. And I think one of the issues there is being in a situation where you're able to provide that long term advice and have the capability of being able to do that as an organisation.
______________________________________________________________________________________Life expectancy is just one issue that is changing the ways businesses are thinking and operating. Inside Finance will bring you more perspectives on the big issues in 2014.