This guest blog comes from our friends at Royal London Ireland for Pensions Awareness Week 2022.

I’m coming up to my retirement in 2022. I had two defined contribution pension funds, which I recently consolidated into one. While I’ve done well in terms of maintaining a healthy level of contributions over the years, I must admit I know very little about what to do next to make sure that the money I’ve worked hard to save lasts throughout the whole of my retirement. What options can I consider for managing my pension pot when I retire?

When it comes to pensions, each person’s requirements differ and the amount of sustainable income you can take from your retirement plan will generally depend on things such as income needs, life expectancy, and personal circumstances.

Getting expert financial advice is crucial in finding the best methods of sustaining your desired level of income throughout retirement. While there is still reluctance out there to source financial advice, often on the belief that it can be costly, poor value, or that sufficient information can be found online, foregoing expert advice on how best to manage your fund can be very risky. Poor investment or management choices can lead to depletion of funds, liability for unnecessary tax bills, or to signing off on products or investments that are unsuitable for you.

It’s important to consider what your essential income needs will be as distinguished from any additional income requirements. What will your basic expenditure needs be per month? This might include a mortgage or rent, loan repayments, bills, lifestyle costs, and healthcare. Additional costs could be any travel plans, hobbies you might want to start, home improvements, or indeed monies for children in respect of support with a house deposit, for example, or for a legacy or inheritance.

There are a few different approaches to drawing down your income, depending on how you would like to manage your money.

An annuity is a contract between you and a life assurance company that guarantees a fixed, regular payment throughout your retirement – essentially it converts your pension pot into an income stream. When quoted for an annuity, you’ll be given a percentage annuity rate. The calculation to find out how much retirement income you’ll get every year is based on your total pension pot. So, for example, if you have €100,000 in your pension pot and are offered an annuity rate of 3.0%, you’ll get an annual income (before tax) of around €3,000 a year.

An annuity can make sense as part of an overall retirement plan, particularly for those who feel concerned about investing their money, but as an annuity is irreversible it’s important to talk to your Financial Broker before deciding.

An Approved Retirement Fund (ARF) is the alternative and a popular option for many as it provides flexibility and control over funds. Some, or all, of your pension fund value is placed in a range of investments, and income can then be drawn down on a regular or ad hoc basis. Depending on your attitude towards risk, you can invest in a wide range of asset classes, giving you the potential to keep growing your retirement fund after you have finished contributing to it. Of course, as it is an investment, it’s important to remember that the value of your ARF can fall as well as rise. 

An ARF can be transferred to a spouse/civil partner tax-free upon your death, who can then continue to manage the portfolio and make withdrawals. Another option is to transfer the ARF to a son, daughter, or other nominee; the transfer of which would be subject to income and/or inheritance tax considerations.

Getting financial advice from a Financial Broker will help you make the best of your savings over the longer term.

This does not constitute financial advice.

Answer provided by: Mark Reilly, Pensions Proposition Lead, Royal London Ireland