Accessing your pension: Annuity vs Flexi-Access Drawdown

Accessing your pension: Annuity vs Flexi-Access Drawdown

In the past, the majority of people saved for retirement over their working life, gave up work on a set date and used their pension savings to purchase an Annuity. However, as retirement lifestyles have changed, so too have the options you’re faced with as you approach the milestone. If you’re nearing retirement, you may be wondering if an Annuity or Flexi-Access Drawdown is the right option for you.

Since 2015, retirees have had more choice in how they access a Defined Contribution pension. If you want your pension to deliver a regular income, there are two main options – an Annuity or Flexi-Access Drawdown – to weigh up. So, what are they?

Annuity: An Annuity is a product you purchase using your pension savings. In return for the lump sum, you’ll receive a regular income that is guaranteed for life. In some cases, this can be linked to inflation, helping to maintain your spending power throughout retirement. As the income is guaranteed, an Annuity provides a sense of financial security but doesn’t offer flexibility.

Flexi-Access Drawdown: With this option, your pension savings will usually remain invested and you’re able to take a flexible income, increasing, decreasing or pausing withdrawals as needed. Flexi-Access Drawdown provides the flexibility that many modern retirees want. However, as savings remain invested they can be exposed to short-term volatility and individuals have to take responsibility for ensuring savings last for the rest of their life.

There are pros and cons to both options, and there’s no solution that suits everyone when considering which option should be used. It’s essential to think about your situation and goals at retirement and beyond when deciding.

It’s worth noting, that pension holders can choose both an Annuity and Flexi-Access Drawdown when accessing their pension. For example, you may decide to purchase an Annuity to create a base income that covers essential outgoings, then using Flexi-Access Drawdown to supplement it when needed. It’s important to strike the right balance and other options could affect your decision too, such as the ability to take a 25% tax-free lump sum.

5 questions to ask before accessing your pension
1. What reliable income will you have in retirement?

Having some guaranteed income in retirement can provide peace of mind and ensure essential outgoings are covered. But this doesn’t have to come from an Annuity. Other options may include the State Pension or a Defined Benefit pension.

Calculating your guaranteed income can help you decide if you need to build a reliable income stream or are in a position to invest your Defined Contribution pension savings throughout retirement. If you decide Flexi-Access Drawdown is an appropriate option for you, it’s a calculation that can also inform your investment risk profile.

2. What lifestyle do you want in retirement?

When we think of retirement planning, it’s often pensions and savings that spring to mind. However, the lifestyle you hope to achieve is just as important. Do you hope to spend more time on hobbies, with grandchildren or exploring new destinations, for instance? Thinking about where your income will go, from the big-ticket items to the day-to-day costs, can help you understand what income level you need.

3. Do you expect income needs to change throughout retirement?

The second question should give you an idea of how your income will change throughout retirement. Traditionally, retirees see higher levels of spending during the first few years before outgoings settled, with spending rising in later years again if care or support was needed.

However, your retirement goals may mean your retirement outgoings don’t follow this route. If you decide to take a phased approach to retirement, gradually reducing working hours, you may find that a lower income from pensions is required initially. Considering income needs at different points of retirement can help you see where flexibility can be useful.

4. Are you comfortable with investing?

Flexi-Access Drawdown has become a popular way for retirees to access their savings. There are benefits to the option but you should keep in mind that savings are invested. As a result, they will be exposed to some level of investment risk and may experience short-term volatility. Before choosing Flexi-Access Drawdown, it’s important to understand and be comfortable with the basics of investing.

Investment performance should also play a role in your withdrawal rate. During a period of downturn, it may be wise to reduce withdrawals to preserve long-term sustainability, for instance. This is an area financial advice can help with.

5. Do you have other assets to use in retirement?

Whilst pensions are probably among the most important retirement asset you have, other assets can be used to create an income too. Reviewing these, from investments to property, and understanding if they could provide an income too can help you decide how to access your pension.

We know that retirement planning involves many decisions that can have a long-term impact. We’re here to offer you support throughout, including assessing your options when accessing a pension. If you have any questions, please get in touch.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation, which are subject to change in the future.

Investment market update: April 2020

Sadly, the market news for April continues to be pessimistic as economies around the world continue to grapple with the impact of Covid-19. The good news is that some of the short-term volatility seen in March has calmed. However, when looking ahead for the next few months and beyond, there’s still a lot of uncertainty.

With countries in Europe and further afield in lockdown for much of April, it shouldn’t come as a surprise that recession fears continue. The World Trade Organisation suggests world trade could shrink by up to 30% in 2020, a bigger drop than the one that followed the banking crisis in 2008. The International Monetary Fund has also warned the world faces the greatest recession since the 1930s. The organisation now expects the global economy to shrink by 3% in 2020, rather than the 3.3% growth predicted at the beginning of the year.

As of the end of April, governments are looking at ways to begin lifting lockdown measures in many countries. How countries respond in the following weeks could give a better indication of what’s to come for the rest of 2020.

UK

The headline figures from the UK highlight how many businesses are struggling to continue operations amid the lockdown restrictions.

Figures from the Office for National Statistics revealed that one in four firms have temporarily closed amid the coronavirus pandemic. Of those firms still operating, many are using the government scheme to furlough staff, with the government paying up to 80% of wages. The scheme has now been extended to October.

In a bid to support businesses getting back on their feet once restrictions are lifted, Chancellor Rishi Sunak unveiled the Bounce Back Loan Scheme, which will help SMEs borrow between £2,000 and £50,000. The government will guarantee 100% of the loan.

The UK composite PMI slumped to just 12.9 in April, down from 36 in March. Anything below 50 indicates a contraction and the latest figure is worse than even pessimistic forecasts expected. Other readings show:

  • UK factories cut jobs at their fastest pace since 2009 after both output and new orders fell, according to Markit
  • Construction activity fell at its steepest pace since 2009, with an IHS Markit reading of 39.3 in March, down from 46

With the travel sector among the hardest hit, airlines have been lobbying the government. There has been growing pressure to bail out Virgin Atlantic, and Airbus and Rolls-Royce are among those calling for greater support.

As the vast majority of shops are shut, retail is another sector that’s suffering due to the restrictions. According to Springboard, UK retail footfall fell sharply by over 80% in the last week of March. Focussing on individual companies, Debenhams, which has been struggling for some time, filed for administration. Well-known high street brands Oasis and Warehouse also collapsed into administration in April.

Europe

The picture across Europe is broadly similar to that in the UK, with businesses struggling and fears of a deep recession growing.

Germany, often seen as the stalwart of the continent, is expected to see GDP shrink by 9.8% in the second quarter. This would be the biggest decline since records began in 1970. With this in mind, it’s not surprising that business confidence in the country is falling. The monthly IFO survey slumped to 74.3 from 85.9, a record low and the biggest monthly fall on record.

Looking at the eurozone as a whole, the PMI data indicates a sharp contraction, similar to the one experienced in the UK. The indicator hit an all-time low of 13.5 in April, down from a prior record low of 29.7 in March.

Once again, the airline industry has been one of the hardest hit in Europe. IATA, the European industry body, has stated that 90% of flights in Europe have been cut, placing 25 million aviation jobs at risk. One of the challenges facing the industry is handling refunds for cancelled flights. The body estimates airlines have £28 billion in tickets that are eligible for refunds.

US

One of the statistics from the US highlighting the situation is the unemployment figure. As jobless claims increased to exceed six million, unemployment reached 4.4%. With the Trump administration often using employment figures to indicate success, it comes as a blow. As restrictions start to be lifted in the US, it’s hoped the job market will begin to recover but how long it will take remains to be seen.

Mimicking other economies, US factory production also slumped. According to Markit, last month experienced the fastest rate of decline since the 2008 financial crisis a decade ago.

Asia

As Asia was the first area to be hit by coronavirus and lift lockdown restrictions, the region could indicate how other economies will fare in the coming weeks and months.

Trade data from China shows tentative signs of recovery. The figures for March show exports fell 6.6% and imports shrank by 0.9% year-on-year. Whilst still in decline, it’s a marked recovery when compared to January and February, providing some light at the end of the tunnel.

In a bid to get the economy moving, China announced it was slashing the amount of cash SME banks have to hold in reserve. It’s hoped this move will pump more liquidity into the economy and release around 400 billion yuan (£46 billion) into the market.

Japan has also announced a stimulus package worth 108 trillion yen (£811 billion) in cash payouts to households and small businesses, as well as deferred social security and tax payments.

Whilst the market news paints a gloomy and uncertain picture, it’s important to remember that you’ve invested with a long-term goal in mind. Portfolios have been stress-tested and chosen in line with your risk profile and aspirations. If you have any concerns about your investments, please get in touch.

Please note: The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

7 tips for homeschooling

With schools closing down several weeks ago and no firm plans of when children will be heading back to the classroom yet, parents across the UK are having to tackle homeschooling. It’s an experience that can be rewarding, but that doesn’t mean it’s not without its challenges.

Whatever age your child is, there’s an overwhelming amount of information available online about education and the ‘dos and don’ts’ of homeschooling. It can be difficult to sift through all that and some parents are finding themselves under pressure as they try to maintain the same level of education children would be receiving at school. If it’s something you’re struggling with, these seven tips could help.

1. Set a routine, but remember it’s not school

Setting a routine as much as possible is advisable. Understanding what they’ll be doing each day can help keep children focused on the work and projects they’ll be carrying out, remember to schedule in breaks and lunch too so they know when a recess is coming up too.

Whilst at first you may be tempted to plan a full school schedule from 9-3 filled with academic subjects, this can be challenging at home. Set a realistic routine that includes the core subjects of English and maths each day and a few other subjects that you can get more creative with. It’s worth keeping in mind that without the distraction of classmates and one-on-one attention from parents, children are likely to get through the work they’d typically do at school faster too.

Remember that school classes aren’t all academic either, taking part in art projects and playing are part of a typical school day. So, don’t beat yourself up if your child isn’t sat at a desk during their typical school hours.

2. Create a designated space

You may be working from home too, making designated office and classroom space a little tight. But setting some space aside can help children get into the right frame of mind and enable them to step away from schoolwork once ‘classes’ have finished. Whether it’s at your dining table or in the home office, try to make sure the space is as free from distractions as possible. A clean space with everything they need at the start of each session, from water to pens, can minimise the number of disruptions and get the work completed quicker.

3. Find out how your child works best

School can be fairly rigid in how they teach children, after all, there can be 30 children in a class. Homeschooling presents an opportunity to find out how your child prefers to learn, something that will be invaluable for them as they progress through education and have to take more responsibility.

Homeschooling is a chance to let children learn at their own pace too. Those that get a concept quickly aren’t held back and can move on to something else, whilst you can dedicate more time to those areas where they need more support to fully understand the work.

4. Don’t be afraid to use the TV and online resources

We read a lot about the importance of limiting screen time, especially for young children. But the TV and internet offer fantastic resources that can help children learn and make it fun too. Take history, for example, the CBBC Horrible Histories TV show is filled with games and songs that will entertain whilst teaching, or you could visit the British Museum from your sofa to discover the ancient Rosetta Stone and Egyptian mummies. Using pen and paper is still important, but technology can help escape the monotony of lockdown and inject some much-needed fun.

5. Arrange study sessions

Some schools across the country are hosting online teaching sessions. These are a great opportunity to learn with their teacher and see friends. With children missing out on the social aspect of school, these are important for simply chatting and catching up too.

If your child’s school hasn’t arranged these or you know that your child learns best in a group, why not organise a study session with some friends? It can help motivate them and improve their learning outcomes. Depending on the age of your child, one option would be to put a different child in charge of a ‘lesson’, providing a sense of responsibility and an opportunity to improve understanding by explaining it to others.

6. Let them have some say in projects

Now is a great time to let children indulge in passion projects. Whilst the core subjects of maths and English are essential to maintain when homeschooling, it’s worth asking what they’d like to learn about too. Whether science experiments or learning how to code sparks their interest, it can help get them through the day and provide a chance to build skills and knowledge they enjoy.

7. Get active

School isn’t about just sitting at a desk and learning, breaks, lunchtime and PE class are an important part of education and good for mental and physical health too. If children are flagging when it comes to the usual school tasks a quick burst of energy can help them focus ready for the next session.

Try incorporating some form of exercise into your routine every day. The Body Coach Joe Wicks has been doing a daily PE class online that’s gone down incredibly well across the country. The live sessions are fun and whether you choose to join in or take the time to focus on other areas, they’ll keep the kids entertained for 30 minutes.

Mindfulness: How to reduce stress and anxiety

At times we all feel stressed and anxious. Amid the current circumstances, you may feel more stressed than usual and not able to access your usual way of unwinding, whether it was hitting the gym or meeting up with friends. Mindfulness can help you feel calmer and better deal with the challenges of the day.

Mindfulness has become something of a buzzword recently and you’d no doubt heard of the term. But what does it actually mean? It’s a technique that focuses on being present in the moment without judging anything. It has links to Buddhism and meditation, but you don’t have to be spiritual to benefit from mindfulness.

Among the aims of mindfulness are helping you be more self-aware and feel calmer. With uncertainty over the pandemic, it’s not surprising that more people have concerns about their daily life. Making mindfulness part of your routine can help improve day-to-day wellbeing now and in the future.

How does mindfulness help ease stress?

When we’re stressed is often down to things that are outside of our control or concerns that haven’t yet materialised. Mindfulness is about focussing on the present and what you’re feeling now. Mindfulness can help you reduce stress by pulling our focus away from those areas that may be causing concern.

There are plenty of mindful activities to try too, so you’re able to find something that suits you. Meditation is one exercise that often springs to mind when thinking about mindfulness. But if you prefer to keep active, yoga may be better suited and those that enjoy getting creative can find colouring or other artistic projects just as relaxing.

5 tips for practising mindfulness
1. Switch off the electronics

Electronics provide numerous distractions. If you’re someone that is always looking at your phone or has music playing in the background, mindfulness exercises allow you to put down electronics for a short period. With the opportunity to connect with people at our fingertips, it’s not surprising that it can be difficult to focus on what’s happening now in your space only. Taking some time away from gadgets, even if it’s just five minutes, could be just what you need.

2. Start small when it comes to meditation

If you’re not used to it, you can get frustrated with mediation. Perhaps you’re annoyed at yourself because your thoughts keep drifting to worries or you can’t sit still. But it’s something that defeats the object of mindfulness! Start small when it comes to meditation, even just a few minutes clearing your mind can help you reset. Don’t worry if your thoughts drift either, it’s natural. Instead, acknowledge them, being mindful of why they’re coming to your attention, and try to let go.

3. Focus on what’s happening now

If you’re typically a multi-tasker, mindfulness can help slow you down in a good way. Even when we’re trying to focus on a project at hand, it’s easy to slip into thinking about past experiences and worrying about what the future will bring. Mindfulness aims to bring you back to the present and allow you to focus on what’s happening now. It’s a step that can help shut out concerns and worries that may not be useful when you look at the task objectively.

4. Focus on the positive and practice gratitude

Part of mindfulness is being grateful for what you already have. Amid hectic lifestyles, it can be easy to overlook the positive things that are already in your life, both big and small. Taking some time to think about them can deliver more confidence, improve your mood and allow you to focus on priorities. Some people prefer to write down what they’re grateful for, like a journal, but just pausing from time to time to appreciate the good things in life can be just as effective.

5. Enjoy just doing ‘nothing’

Finally, enjoy the time you set aside for being mindful. In our day-to-day lives, we’re often busy and focused on numerous things at once. Some people can feel guilty when they’re doing ‘nothing’, but sitting down and just being can be just as useful. Even if it’s just for a few minutes, it can provide you some time to focus on yourself and rest. Rather than seeing meditation or mindfulness activities as a waste of time, enjoy the feeling to get the most out of it.

Lockdown checklist: 6 financial steps to take during the pandemic

If you’ve been putting off reviewing your finances, the lockdown is the perfect opportunity to complete some tasks that could help make sure your finances and plans remain on track. With potentially more time on your hands, here are seven things to do during the stay at home period.

1. Review your will and Power of Attorney

It’s estimated that more than half of UK adults don’t have a will in place and even more haven’t established a Power of Attorney. These two legal documents are vital for ensuring your wishes are carried out. Even if you do have both these in place, take some time during lockdown to review them.

A will is the only way to ensure that your wishes are carried out when you pass away. If you already have a will, you can write a new one or add a codicil to make amendments if your wishes have changed. It’s generally a good idea to review your will following life events and every five years.

A Power of Attorney gives someone you trust the power to make decisions on your behalf if you’re unable to do so. Losing the mental or physical capacity to make your own decisions isn’t something anyone wants to think about, but a Power of Attorney is important. There are two types, one covering health and wealth decisions and the other covering finances, you should have both in place.

2. Update your pension expression of wishes

Did you know your pension benefits aren’t usually covered by your will? Instead, you should complete an expression of wishes with each pension provider, stating who you’d like to benefit from your pension savings if you pass away. As pensions do not form part of your estate for Inheritance Tax purposes and are likely to be one of your largest saving pots, they’re a valuable asset to consider as part of legacy planning.

3. Find out if you have any ‘lost’ pensions

Over the years you may have accumulated several pensions as you switch jobs. If the pension is relatively small or the employment was from some time ago, it’s easy for pensions to become ‘lost’. Luckily, the government has a service that can help you find lost pensions and start taking them into account when it comes to retirement planning. You can find the contact details for workplace and personal pension schemes here.

4. Check your National Insurance record

It’s simple to check your National Insurance record, you can do so here. This tracks how many full years of National Insurance you’ve paid, as well as any National Insurance credits you’ve received, such as when taking time out of employment to raise children or care for someone. Why is this important? You need to have 35 qualifying years on your record to be eligible for the full State Pension when you reach retirement age. If you have gaps, it may be possible to pay voluntary contributions. The sooner you know there’s a gap, the better position you’re in to make the right decision for you.

5. Evaluate financial protection

If you already have financial protection in place, now is a good time to review the policies. As circumstances and priorities change, the policies that are right for us change too.

Whether you have an income protection policy, critical illness cover or life insurance, you should take some time to understand what each policy covers and whether they remain appropriate for you. Life events may mean that your current protection needs to be updated. These events could include starting a family, paying off your mortgage or starting a new job.

If you don’t currently have any sort of financial protection in place, it’s worth considering what would happen if your income suddenly stopped, you were diagnosed with a critical illness or the position your family would be left in if you were to pass away. It’s not something anyone wants to think about, but doing so can help you put steps in place to safeguard your and your family’s future.

6. Consider making gifts now

The current situation has placed a lot of people under pressure financially. Whilst your finances may be secure, your loved ones may not be in the same position and you may want to provide some support.

If this is the case, making use of the gifting allowance can make sense. Gifts are classed as Potentially Exempt Transfers when given. This means they can be considered part of your estate for Inheritance Tax purposes if you die within seven years of them being received. However, some gifts are considered immediately outside of your estate. This includes the gifting allowance. Each tax year, you can gift up to £3,000 to loved ones, which can be carried forward a year if unused, under this rule.

Other gifts that are immediately exempt from Inheritance Tax include those that are given from your disposable income.

During these times of uncertainty, we know that you may be worried about your finances and long-term plans. We’re still here for you, please get in touch if you have any queries about the above checklist or other aspects of your financial plan.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.

The tax implications of pension withdrawals will be based on your circumstances, tax legislation and regulation which are subject to change in the future.

The Financial Conduct Authority does not regulate will writing or estate planning.