Choosing how to take your pension savings is likely to be one of the most difficult financial decisions anyone will face in later life.
At a time when most prefer to fine-tune plans for the Spanish bolt hole, there will be a need to make often irreversible and complex decisions about how to make your savings last and how to protect your funds from unpredictable factors, such as inflation and rising longevity.
For most people, the choice will come down to striking a balance between minimising the risk to their capital, but also retaining control over their funds.
Individuals are no longer compelled to convert their benefits into an annuity but have a wide range of options, depending on what balance they wish to achieve. Each option has its advantages and disadvantages.
At one end of the risk scale are annuities, which are the seen as the most financially secure.
At the other end are unsecured pensions or income drawdown, which allows investment freedom.
The majority of pre-retirees still opt for the security of a conventional annuity, in which your pension pot is exchanged for a guaranteed regular income for life, regardless of stock market movements.
In spite of annuity rates being perceived as poor value, they remain popular as rising longevity puts more pressure on pensions savings.
"For many people the problem is not dying too early, but living longer than expected," says Billy Burrows managing director of William Burrows Annuities.
"Annuities are based on the concept of a mortality cross-subsidy so annuities provide valuable protection against outliving their assets."
But financial security doesn’t come without a cost. Once bought an annuity cannot normally be changed, transferred or cashed in.
Second, annuities cannot be passed on to your heirs or other beneficiaries when you die, meaning the funds die with you.
Index-linked and with-profits annuities have introduced some flexibility to these strategies with a choice of death benefits and investment control, but they can't wipe out these drawbacks for many.
The lack of flexibility and the perception that annuities are poor value, means many people are increasingly looking for more suitable alternatives.
One of the most popular is unsecured pensions (USP), or income drawdown.
USP arrangements allow an individual – either in a personal pension or stakeholder – to draw an income from their pension fund while the fund remains invested.
"These funds are popular with those with bigger funds and other streams of income, who want investment control over their benefits," says Nigel Barlow, technical and commercial manager with Just Retirement, a financial services company.
The maximum level of income that can be drawn is about 120 per cent of the level lifetime annuity payable to a single person of your age and sex.
A lifetime annuity can be bought at any time but by age 75 the remaining pension funds must be used to either purchase a lifetime annuity or enter into Alternatively Secured Pension (ASP).
Aside from investment control, another key perk of USP is that benefits can be passed on to heirs, minus a 35 per cent tax charge - although only until age 75, when you will have to switch out of USP.
The biggest drawback to USP is that funds are subject to investment risk. "If you had entered into drawdown in the mid-1990s you would have dropped right into the middle of a three-year bear run," says Barlow.
"If you couldn't afford your income to fluctuate by much you would not have been able to ride out that risk."
Another, albeit less popular, option is phased retirement, or staggered vesting.
This arrangement has been likened to taking lots of mini retirements as it allows an individual to buy an annuity or go into drawdown in stages.
The main perk of this strategy is that you can use the tax-free cash each time you "mini retire" as well as the annuity or USP, to provide income.
"This can be a very useful tool for those wanting to ease back gradually on work and start to replace earnings with pension income," says Jason Butler, certified financial planner with Bloomsbury Financial Planning.
"It also provides more flexible help for your survivors if you die before converting the whole of your fund to annuities."
The drawbacks again are that the income is subject to investment risk and high investment charges, meaning it, like a USP, is unsuitable for those who have no other assets or income to live on.
There is also a risk that annuity rates may be worse by the time you are required to buy an annuity by the age of 75.
Another option is ASP. These arrangements work in a similar way to USPs in terms of investment flexibility but allow those aged 75 or over to bypass annuities.
However, measures in the Budget knocked this as a tax-planning tool, as any lump sum death benefits will be taxed at up to 70 per cent and could also be subject to inheritance tax.
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