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  • How to retire now and still have pension freedom next year

    Ruth Richards explains how investors can retire now yet still take advantage of pension freedoms next April.

    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

    From April next year, pension rules are set to change. The Chancellor proposed in March 2014 that investors at retirement should have unlimited access to their pension. The details are yet to be finalised.

    But as policymakers and product providers scrabble to turn the changes into reality, around a third of a million people will reach the point when they would otherwise convert their private pensions into tax-free cash and income.

    Must these people sit tight, waiting for new rules, or are there options available to them now?

    Request your guide to Your options at retirement

    What if you need tax-free cash and income now?

    No recommendation

    No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

    If you need secure income, the pension freedom offered by the new rules may be a red herring. You are likely to need to convert at least part of your pension into an annuity, a secure income for life. An annuity provides a regular pay cheque, each year, no matter what. It is the only way of providing a guaranteed income for life regardless of how long you live.

    We conducted research amongst our own clients in May 2014 and 94.2% of investors who had deferred their retirement due to the Budget said secure income is very important (55.6%) or quite important (38.6%) to them.

    Compare our best buy annuity rates now

    You could receive more annuity income if you smoke, drink alcohol, are overweight or have one of 1,500 medical conditions, via an enhanced annuity. It's estimated 70% of people could qualify for better incomes in this way. In June 2014, Hargreaves Lansdown increased the annuity income quoted by an average £1,133* per annum for clients who entered health details online.

    When you buy your annuity, you will normally be offered up to 25% of the pension fund as a tax-free lump sum.

    Compare our best buy annuity rates now

    Use health and lifestyle to boost income

    Compare, at a glance, the options at retirement

    * Average increase quoted in June 2014, based on the top and bottom rate for 417 clients entering medical details online. Actual increases will depend on your pension value and personal circumstances.

    If you don't need secure income yet

    Investors who don't need a secure income yet have more choices.

    One option is to simply wait and see what format the new rules take. The changes are expected to come into force from April. Generally speaking the death benefits are more tax efficient before you move to a retirement product such as an annuity or income drawdown.

    Another option is to consider income drawdown, the main alternative to an annuity. In income drawdown, you can take your tax-free cash and then draw the income you need directly from the pension, which remains invested and under your control. There is the option to hold income drawdown in cash for the short term, to tide you over until the new rules come in.

    As a stop-gap, we believe income drawdown held in cash is considerably more flexible than other post Budget short-term plans that lock investors in for up to a year and have restricted death benefits.

    Guide to Income Drawdown

    To discover the benefits and risks of choosing income drawdown at retirement, request your FREE guide now

    Income Drawdown Guide

    There are risks with this approach and income is not secure so it is not suitable for everyone. If investments perform badly or you withdraw too much income, your overall retirement income will fall. Currently there are limits on the income you can take, but these are likely to be removed entirely from April. An additional risk/benefit is that if you live longer than expected the money could run out, but if you die earlier then unlike an annuity your beneficiaries stand to benefit from any surplus.

    Income drawdown does offer more options than an annuity for the remaining pension when you die, as there is the possibility of passing whatever is left on to your dependants.

    Find out more about income drawdown in the Vantage SIPP

    See what happens in income drawdown when you die

    Important: holding everything in cash is not a practical long-term investment strategy for a drawdown plan, because its real value will fall over time. It has no potential for growth and will be eroded by inflation and withdrawals, so the value of the income you can take long term will fall.

    What if you just want tax-free cash?

    There is also an option to take up to 25% tax-free cash only, and go into income drawdown but take no income, or a short term income, to tide you over until the new rules come in. Once you are in income drawdown there is some flexibility on what happens to the pension when you die, and whilst this is more flexible than the options an annuity gives you, it is not as favourable as the options available to untouched pensions before you go into drawdown or an annuity.

    If you don't need tax-free cash and/or income yet then consider leaving the pension intact as the tax treatment on a lump sum paid on death may be better than the treatment for funds that have moved into income drawdown. In theory it is possible to take tax-free cash and leave the rest of the benefits intact without going into income drawdown but in practice few providers offer this yet.

    Request your guide to Your options at retirement

    Find out more about income drawdown in the Vantage SIPP

    Mix and match

    It need not be a case of choosing one option over another, or of acting in haste.

    You don't need to convert all of your fund in one go. You may phase in your retirement, or use a mix and match approach, using an annuity to cover your fixed living costs and drawdown for what is left.

    Compare your retirement options now

    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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