When planning for retirement a lot of the conversation is around starting a pension. But what happens after you retire? A pension is a way of saving for retirement but how do you translate that pension into an income in your retirement? What are your retirement options and do you understand them?
The first thing to know is that you can take a portion of your pension fund as a tax-free lump sum. The second is that you have two options – an ARF or an Annuity – to choose from using the balance to turn it into an income. Which option you choose is down to your own individual circumstances and preferences.
What is an ARF?
An ARF (Approved Retirement Fund) is a product that allows you to keep your money invested as a lump sum after you retire. This means you can manage your pension assets in whatever way you prefer and withdraw an income from the fund as you need it. Currently you must withdraw a minimum of 4% of the fund value each year. A big benefit of this type of personal retirement investment fund is that any balance remaining in your fund is payable to your estate after your death. ARFs were only introduced in 1999 but have been growing in popularity since then.
What is an Annuity?
An Annuity would have been the more traditional option at retirement to provide a stable income for the rest of a person’s life. It is a simple retirement payment option that guarantees to pay a particular amount every month in retirement. An annuity is purchased from an insurance company in exchange for the accumulated pension fund. There are a range of different annuity types and it’s important to ensure that the one you choose suits your needs.
Key differences
When considering your retirement options it’s important to understand the key differences between the two product types:
- At retirement, an annuity provides a guaranteed regular income for the rest of your life. An ARF allows you to remain in the investment market.
- You receive a regular pre-set income when you have an annuity but with an ARF you can withdraw funds whenever you wish (subject to minimum levels and tax).
- An annuity gives you a guaranteed income and removes the risk of stockmarket volatility that is associated with an ARF
- An annuity will cease once you die but an ARF generally passes to your estate.
Which is the best choice for me?
The answer to this question is down to your own personal circumstances including what other sources of income you may have and your attitude to risk. How you fund your retirement is a big decision and it is important to get advice on the different options and how they work. Just get in touch if you’d like help in starting to consider your retirement options.