Delay repairs, focus on growth: an alternative retirement plan worth pondering
Retirees approaching a life of pension income are often faced with a choice between an annuity that guarantees a steady income for life but limits further investment growth, or direct pension fund withdrawals that offer no guarantees but leave the savings invested for potential future growth. However, a new approach is gaining attention: a "flex first, fix later" strategy. This hybrid approach advocated by the Institute for Fiscal Studies (IFS) combines drawdown income in the early years of retirement with the security of an annuity later on.
In the first ten years of retirement, the pension savings would remain invested to continue any possible growth, while income would be directly withdrawn from the pension pot. After about a decade, the retiree would use the accumulated value to purchase a guaranteed annuity income for the rest of their life. This strategy offers several advantages:
- Retaining investment growth potential for decades to come, instead of locking into a guaranteed income at retirement when annuity rates might be lower.
- A higher annuity income due to later purchasing, which tends to result in increased annuity rates as age progresses.
- Key decisions would be made at a time when cognitive decline is less likely to impact judgement, ensuring informed choices.
Although the IFS places emphasis on pension companies developing "flex first, fix later" products, savers are not confined to waiting for them. Currently, retirees can opt for drawdown products initially, purchasable annuities later on, whenever it suits them best.
One concern is managing investment risk in later years and cultivating an ongoing review of pension plans. Meeting periodically with an independent financial adviser can force regular reviews and support sound decision-making. Another solution is a deferred annuity, where a portion of the pension fund is earmarked for an annuity income that kicks in at a specific age in the future.
However, this strategy is not a one-size-fits-all solution. It still leaves the retiree exposed to investment risks. Proper management, particularly leading up to annuity purchases, is crucial. Volatility in the annuity market and decisions based on health or lifestyle problems are also factors to consider. Transitioning from the pension accumulation phase to the decumulation phase calls for good-quality financial advice.
In summary, the "flex first, fix later" approach offers retirees a balanced strategy that protects longevity risk while allowing investment growth in early retirement, potentially leading to a better financial outlook and peace of mind. The approach combines the pros of both traditional annuities and direct drawdown, addressing the shortcomings of each for retirees.
Retirees can maintain investment growth potential for their pension savings in the initial stage of retirement, enabling further growth, as opposed to opting for an annuity that guarantees a steady income for life but limits further investment growth. Moreover, by implementing the "flex first, fix later" strategy, retirees could secure a higher annuity income by purchasing it later on, when annuity rates might be more favorable due to age progression.
