If you’ve decided against purchasing an annuity when it comes to using your pension for retirement then there can be lots of challenges of pension drawdown.
Do you know what you are getting into and do you have the time, inclination and skill to manage it all?
The challenges of pension drawdown
In simple terms there are basically two options when it comes to taking an income from your pension. Pension drawdown is the alternative of taking an annuity.
Last week I wrote an article on the dangers of pension drawdown and the challenges faced.
To recap, using pension drawdown means dealing with:
- Significant stock market crashes.
- The more general ups and downs of the stock market and choosing when to take income.
- The rise in prices of goods and services over time and ensuring your pension keeps up.
- Living longer than expected and making sure your pension doesn’t run out before you do.
As I’ve said before there is no right or wrong way when it comes to deciding whether an annuity or pension drawdown is right for you. It all depends on your individual circumstances and objectives. There are pros and cons for both ways.
5 ways to deal with the challenges of pension drawdown
If you feel that an annuity is not right for you then here are some ideas to think about when dealing with the challenges of pension drawdown.
#1 – Cash flow projection
Put together a cash flow projection for the next 20-30 years and try to plot what you think your likely spending will be and when.
Factor in things like extra holidays, replacing the cars and gifts to children if appropriate. Don’t forget to increase your spending by inflation.
This can help you start to plan when and how much you might need to withdraw from your pension. It can also help you avoid taking out too much too early.
#2 – Consider a smaller annuity
OK so you may be reading this because you’ve already decided against annuities but consider using just some of your pension to purchase a smaller annuity perhaps to cover just your absolute core spending. Things like your utility bills and Council Tax.
By doing this you can feel safe and secure knowing that you will never run out of money to survive. You can then use the rest of your pension pot for drawdown, using it on a flexible basis to top up your annuity income as and when you want to spend more.
You might not want to give up much of your pension for an annuity but a small amount might be all you need to cover your core spending, when you factor in the guaranteed income from your government State Pension for you and your partner.
#3 – Take more risk
This may sound odd and traditionally most people start to de-risk their pensions as they approach retirement.
This is fine if you are going to purchase an annuity but if you are planning on using drawdown for the rest of your life you need your pension to grow.
It may need to grow significantly to keep up with inflation, recover from market crashes and last the extended length of your life.
A low risk investment strategy just isn’t going to cut it.
#4 – Split pots
Following on from the point above, you could split your pension into two pots.
Pot 1 is your low risk pot that you will take income from for the next few years, and pot 2 is your higher risk pot that is allowed to grow over the longer term and has time to recover from any stock market crashes.
#5 – Spending rules
At the start of your drawdown journey you could set yourself some rules.
Remember whilst pension drawdown offers you greater flexibility this can also work against you when you want things more regular and consistent. You can’t have the best of both.
During times when the stock markets have performed poorly you may want to say to yourself that you will limit your spending and try to keep withdrawals to a minimum. Then make up for it when stock markets have good years.
If you would like to find out more about planning for your retirement and your retirement choices please join our Financial Freedom Club for free tips and insights.
If you would like a more in depth discussion on how you can best manage your pension drawdown please get in touch for a free consultation.
Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.