Pension freedoms mean you can now pick your own method for generating retirement income. You're free to buy an annuity, or to avoid them. You can keep your cash in your pension, or withdraw it and pick something else to invest in. Or you can pick a mixture of all the options. The question is what's the best way to do this?
The first step in this process is to understand your options. Annuities remain part of the picture, particularly for those who don't want to risk running out of money during retirement. For a variety of reasons, they don't produce the income they once did, but they are the only way to generate a guaranteed income for life with a defined contribution pension pot. Some people need certainty, and don't want to take any risks, so they will want to buy an annuity with the bulk of their savings. Others will want it as part of a broader mix.
Income drawdown is another popular option, where you leave your pension invested, and draw an income from the pot. This is riskier than an annuity income, because the value of investments can go down - leaving you with less money to live off than you were expecting. On the flip side, there's a chance that the value will increase, so those who are happier taking a risk may want to do this with at least some of their pension pot. Because this involves risk, it tends to be favoured by those who have a guaranteed income already - either through an annuity or from a final salary pension.
Taking the cash out and investing it is also a possibility - if you want to invest in something that cannot be held within a pension. Some people, for example, have chosen to withdraw large sums of cash in order to buy an investment property. If you do this, you need to consider the implications for taxes and any benefits you receive. You also need to appreciate that you are taking a risk.
Of course, unless you buy an annuity with the lot on the first day, you don't have to make one decision and stick to it. Some people opt for phased retirement, for example. Through this they may spend some of their pension pot on an annuity, and continue working part time to generate the rest of their income. The bulk of their pension remains invested. Later, when they stop work, they may choose to take a bit more of an annuity to cover the basic cost of living, and leave the rest invested for dipping into for one-off costs. Alternatively, they may convert the lot into an annuity.
The difficulty with the pension freedoms is that there's no single right answer to the question of the best approach to securing a retirement income. The upside is that if you plan carefully, then you can find the solution that suits you best.
Dream retirement destinations
Dream retirement destinations
A study by MGM Advantage discovered that Portugal is the 10th most popular dream retirement destination among Brits.
You get the attractions of the sun, a more relaxed way of life, lower living costs and cheaper property. You can also benefit from pension arrangements that mean your pension rises with inflation.
And if you choose to, you can spend your time with the enormous expat population, feeling like you never left.
In the tradition of the Best Exotic Marigold Hotel, there’s a large number of people keen to move to India, partly in order to enjoy a much higher standard of living than they would be able to afford in the UK.
If course it’s important to consider that your state pension will not rise in line with inflation - so will halve in real terms during your retirement.
This part of Europe offers a great combination of some of the lowest living and housing costs on the continent, along with a more forgiving climate than the UK.
For that reason Bosnia and Herzegovina, Bulgaria, Croatia, Romania, Greece and Turkey are a big draw for retirees.
However, state pension provision varies across the region, so you will need to check whether retiring to these locations will mean your pension continues to rise in line with increases in the UK, or will be frozen when you move overseas.
Italy is a country of contrasts, so anyone planing a retirement there needs to think carefully about whether they want to call a bustling city home, or whether they would be happiest in the mountains or by the sea.
Housing tends to cost less than in the UK, and in some regions it's incredibly cheap. Living costs are also lower than in Britain, and your pension will rise in line with increases in the UK.
Canada is a big draw for British expats of all ages. This spectacular country is known for being welcoming to people from all over the world, and in many cases has no language barrier for Brits. The quality of life is high, and the cost of housing lower than in the UK.
However, you will need to factor in the fact that your UK state pension will be frozen on the day you leave, and you will need some health insurance if you want to replicate the sorts of things that are available for free on the NHS.
As with India, the Far East offers an exciting and dramatic change from life in the UK, with much lower costs, which can buy you a higher standard of living (although bear in mind your state pension will be frozen).
You will need to consider the cultural and practical differences associated with the move, but you will have the opportunity to live in one of the most exciting places in the world.
The weather, lifestyle, space, and lower cost of living means that British expats of all ages are keen to move to Australia.
Property can be a bit of a stumbling block in some areas, as prices have gone up so much. The currency is also strong, which has posed some issues for those who receive their income in pounds, and there’s the fact that the UK state pension will be frozen if you move. However, if you can overcome these things, then a new life in the sun awaits.
The US offers much more affordable housing, and in many respects a lower cost of living than in the UK.
It appeals to those who don’t want to live with a language barrier, but want more space, possibly more sun, and an American Dream of their own.
There are some important things to factor in before you move, such as the additional cost of healthcare, and the exchange rate. However, one bonus is that your state pension will rise at the same rate it does in the UK.
France is close to home, and yet offers cheaper accommodation than the UK, a lower cost of living, and in many regions there’s better weather too.
Your pension will rise at the same rate it would in the UK, and at any time friends and family are just a short boat or plane ride away. It’s no wonder France is the second most popular dream destination for retirees.
It will come as little surprise that Spain tops the list - largely because it’s already the most common overseas retirement destination for Brits.
Millions of us have experienced the delights of the sun, sea, and the lower cost of living while we were on holiday in the country, so it’s hardly a shock that so many want to experience it on a full-time basis in retirement.
Huge falls in the price of property has made this a cheap place to buy, and the fact that your state pension will keep pace with rises in the UK means you’ll be able to maintain your standard of living throughout your retirement.