It’s well known that people tend to become more financially conservative the closer they are to retirement, and grow increasingly cautious with their pension savings.
At that point the focus is often more about protecting accrued savings rather than building funds for retirement. This has become even more topical after pension freedoms were introduced in 2015, which has given people greater choice but also greater chance of choosing an unsuitable option.
While retirement objectives vary, they commonly include:
- having a guaranteed, increasing income which keeps pace with inflation
- preserving and growing pension savings
- having a degree of flexibility to cater for event changes.
If the overriding objective is having a guaranteed, increasing income for life, a lifetime annuity with built in escalation is likely to be the most suitable option – but not if flexibility is more important. The reason is that a lifetime annuity cannot be changed once the policy goes into force no matter what circumstances may change during what might be a long retirement period.
For some people this means that a flexi-access drawdown which generally offers a high degree of flexibility may be more suitable. However, it is important to understand that by choosing this option it means your pension savings will be invested and therefore at risk of falling in value when stock market conditions are unfavourable.
So is there a plan which can provide guarantees other than a lifetime annuity?
The answer is yes, but with certain caveats. One alternative is to purchase a Fixed Term Income Plan. You can choose to have a guaranteed lump sum paid at the end of a chosen term or alternatively have guaranteed income over your chosen term. In both cases you will know the amounts from the start so you won’t have any nasty shocks along the way. However, similarly to a lifetime annuity you cannot change the plan once it’s in force.
You also need to factor in the effect of inflation on the value of the guaranteed lump sum so you have an idea of the value in real terms at the end of the term. If you decide to have guaranteed income you can opt for it to increase each year to help mitigate the effects of inflation. If you use a professional adviser they will normally make charges for their services and you should take these charges into account.
The CanRetire Fixed Term Income Plan (FTIP) has the following options:
- a known, guaranteed lump sum at the end of your chosen term
- a guaranteed income with increases every year (if you choose this feature) over the term of your choice
- a guaranteed income and a guaranteed lump sum at the end of the term.
For example, you may be semi-retired and require a guaranteed income for a few years to pay for ongoing commitments. When you fully retire, other retirement income may become available, such as the state pension or a company pension which can be used on their own or with the remaining FTIP savings (at the end of the term) to help meet any ongoing commitments.
It is important to understand when the selected term ends and you have chosen to receive a guaranteed lump sum you will have to make further decisions about your retirement provision. So, on the downside, annuity rates may have declined so your savings will buy less guaranteed income than if you had chosen a lifetime annuity from the start. Investment conditions may also be less favourable meaning you may have missed out on potentially higher investment returns had you chosen a flexi-access drawdown at outset.
As with most things in life, compromises often have to be made in order to meet your key objectives.