Retiring in poverty forever?

If you watch the news, you'd be forgiven for believing that anyone retiring now is destined for poverty for the rest of their existence. They are of course looking specifically that people buying an annuity. At retirement, the traditional option was to take 25% as a tax free lump sum, and then buy an annuity with the remaining 75%. A annuity is effectively paying upfront for a fixed lifetime income.

The problem the press are referring to, is caused by two main factors. Firstly, as markets have dropped, peoples funds are worth less, thus providing them with a lower fund with which to purchase their annuity. Secondly, as interest rates are low, and also as a result of the impact of quantitative easing on gilts prices, annuity rates are now quite low. This means the level of income per £ of pension fund has also fallen.

So what is the solution? Well certainly one option is to defer buying an annuity. This does not mean deferring your retirement though. The press are very good at forgetting to mention something called unsecured income. Unsecured income still allows you to take the 25% tax free lump sum, but it allows you to leave the rest of the fund invested. It may be that you can then take no income from the remaining fund, and live off the tax free lump sum for he time being, thus allowing the fund longer to grow/recover. You can however still take an income whilst doing this, allowing you to choose the point in the future that is right to buy an annuity, if there ever is one!

Unsecured income has the potential to get over some of the problems of buying an annuity. Annuities provide a fixed income for life, with no ability to alter this with your circumstances in the future. You also need to decide whether you want a level or increasing annuity, spouses benefit, and any guarantees at the point of buying an annuity, decisions that are very difficult to make with potentially 40 years ahead of you. Unsecured income provides you with the flexibility to adapt as your situation changes, manage your tax more effectively, and provide better death benefits.

It isn't right for everyone, as it can lead to a fluctuation in your income in the future, but there are certain guarantees that can now be applied to underpin the income you receive. These aim to provide you with the best of both worlds.

So, if you are retiring with more than £100,000 in pension, it certainly is something to consider seriously, even if it is a relatively short term measure until you are clearer on the choices you have available.