In April 2015, the government gave you the right to decide how to spend your own pension pot. If I talked you through the legislation, you would be asleep by the end of the first chapter. So lets look at a scenario and possible outcomes resulting from different choices.
Bob was a divorcee, father of 1, in poor health and had worked at Acme Construction for 25 years until retiring at age 65. 2 years prior to retirement, Acme gave him a pension forecast of £9,000 per year plus a tax free lump sum of £80,000.
- Take the company pension.
- Transfer to a Flexi-Access drawdown plan
He took the company pension because that’s what all of his colleagues did. He used £50,000 of the Tax Free Cash to pay off his mortgage and the remainder to supplement his income until his State Pension Age of 67. Bob died 18 months after retirement, having spent only £102,000 of his pension pot worth £330,000. The remaining £206,000 is now in the hands of the pension company. His daughter received no inheritance.
Choice 2: Having been given a Transfer Value of £330,000, Bob decided Flexi-Access Drawdown was for him. He took a Tax Free Lump sum of £82,500 and used £50,000 to pay off his mortgage. He spent the remaining tax free cash on a pioneering medical treatment that increased his life expectancy. Now acutely aware of his mortality, he paid himself an income of £20,000 per year and enjoyed his retirement until his fund was exhausted at age 78. Surviving on the State Pension until he died at age 87 was not so enjoyable. His daughter received no inheritance.
Choice 3: Bob opted for Flexi-Access Drawdown and took a tax free lump sum of £80,000, using £50,000 to pay off his mortgage and £30,000 to supplement his income until State Pension Age. He calculated that if his investments made a real return of 2% a year he could take an income of £12,000 per year. If he survived to age 90 there would still be £64,000 in his fund to leave to his daughter. If he died at age 68 his daughter would receive £250,000.
Would you have been happy with the outcomes of choices 1 and 2? After your house, your pension is likely to be the largest purchase you make. Make an informed choice.