What Happens when I reach my 75th Birthday?
Planning for the final level of your pension will have started from the moment we set up your Managed Retirement Account. Part of the initial analysis will be to assess what level of income you think you are likely to require in your later years i.e. from age 75 onwards. Naturally we build in an allowance for inflation. Thereafter your 'post 75' income requirement is reviewed every year and your retirement 'model' updated accordingly. The objective is to ensure that the most appropriate balance continues to be struck between your short, medium and long term needs, giving you the confidence to enjoy your retirement as much as possible with peace of mind about your future financial wellbeing.
After April 2006 there is no requirement to buy an annuity at 75 although that remains the age at which you must activate any remaining benefits. For some people, particularly those with larger funds who wish to preserve some of the capital for their descendants, remaining in drawdown indefinitely will be attractive. But at age 75 the gross yield available from annuities is far higher than the level of income that is realistically sustainable from a continuing drawdown plan. This is due to the much higher levels of mortality cross subsidy inherent in annuity rates at older ages.
Extended drawdown (technically known as an 'Alternatively Secured Pension') may therefore not be feasible for many people, simply because the level of income that can be sustained will be too low for their needs. Furthermore, extended drawdown carries ongoing risks, whereas a traditional annuity provides certainty as the income is guaranteed. Provision for a continuing guaranteed income for a spouse can be made by arranging annuities on a 'joint life' basis.
If you think that you will wish to take advantage of the new facility then it will be necessary to analyse whether this will be financially feasible well before age 75 as the outcome will have a major bearing on the ongoing investment strategy. If this is not done then there is a significant likelihood of a growing 'mismatch' between the balance of risk and your financial objectives. This could turn out to have serious long term consequences. We therefore expect to start looking at the financial implications even before age 70 with a view to obtaining an indication of the likely extent to which you will 'annuitise' your benefits or continue in drawdown after 75.
Where extended drawdown is not suitable then it will be vital to build up some protection for your pension benefits against a fall in investment markets. This will involve selectively switching out of equity linked investments at favourable opportunities to capture gains and consolidate these into to lower risk investments and/or annuities. However, if extended drawdown is feasible then this progressive switch out of equities and consolidation of risk would not be appropriate. Instead, your portfolio will be adjusted to reflect the need to achieve a sustainable long term income. The investment objective will then be to optimise the performance of the plan, with a relatively stable equity exposure based on the level of risk you are comfortable with.
Although the actual decision to stay in drawdown is not made until age 75, agreeing in principle what will be the most likely route for you will help to ensure that the strategy remains consistent with your objectives. Your options will continue to be reviewed with you annually thereafter.