Revealed: Why pension decumulation matters

Published on August 16, 2023 by Andrew
A mountaineer descending a rocky slope

2023 marks the 70th anniversary of the first ascent of Mount Everest. 

Sir Edmund Hillary and Tenzing Norgay conquered the world’s highest mountain in 1953, as part of an expedition led by British Army officer John Hunt. Since then, more than 6,000 people have made the climb and stood on the roof of the world.

Sometimes you might feel like reaching your retirement is an uphill battle. But it’s important to remember that this personal summit isn’t the end of your journey.

Managing pension decumulation is key to a happy retirement. Recent data from the Financial Conduct Authority (FCA), though, suggests that increasing numbers of retirees are foregoing decumulation advice and risking running out of money in retirement.

Retirees are increasingly “going it alone”, underestimating the complexity of the choices they’ll face  

Figures from a recent FCA report, published by Actuarial Post, suggest increasing numbers of us are retiring without seeking advice.

Of the more than 267,000 decumulation products – including drawdown and pension annuities – sold in 2022, 41% were sold without advice. This compares to just 34% in 2018. During the same period, advised sales dropped by 7%. Worryingly, non-advised sales rocketed, up 24%.

Different retirement options involve different levels of decumulation complexity. 

An annuity provides a guaranteed income for life so budgeting may be easier than with a flexible drawdown product, for example. But because an annuity is guaranteed for life, choosing the right one on the right basis becomes even more crucial.

Managing your flexi-access drawdown income, meanwhile, has its own set of challenges. These include managing market volatility, the impact of inflation, and your longevity.

Here are three key factors to consider and why seeking professional financial advice is key.

1. Always shop around for the best annuity deal

Once you use your defined contribution (DC) pension pot to purchase an annuity, you’ll receive a guaranteed income for life. This offers huge stability. Outside of any cooling-off period, though, once you select your basis and start payments, you are stuck with your decision.

This is great if you’ve made the right choice, but the effects of a bad one can be long-lasting.

In October 2022, MoneyAge confirmed that annuity rates had reached a 14-year peak. They’ve remained high ever since, making an annuity a potentially useful option for you.

It’s not all good news for annuities though. Rising rates have been accompanied by a widening of the gap between the best and worst available. 

In fact, FTAdviser recently reported that the disparity between rates was the widest it’s been in four years, with an 18% difference in income from best to worst. 

Throughout a lifetime, 18% could make a massive difference to the lifestyle you can lead while your pension decumulates. It also highlights the importance of shopping around and seeking advice on the most suitable option based on your circumstances. 

2. Consider the effects of inflation on your stable annuity income

Different decumulation options place different budgeting pressures on you and require different levels of input. But all of them can be affected to some extent by the wider markets and economy.

If you opt for an annuity, you’ll have the benefit of a steady and stable income. But you’ll need to factor in the effects of inflation. 

With the UK experiencing a cost of living crisis, you’ll understand the significance of rising prices, and the effects this can have on your finances.

Opt for a fixed annuity and you’ll receive the same amount for the rest of your life, but how far will your cash stretch in the future? 

Most providers will allow you to choose an annuity that rises each year to combat the effects of inflation. Your starting amount may be lower but you’ll likely appreciate the benefits of a rising payment later in retirement.

3. Understand the effect of stock market volatility and flexible withdrawals

Pension Freedoms options like flexi-access drawdown offer huge flexibility but with the added pressure of forcing you to budget effectively.

It’s important to remember that this doesn’t mean picking an amount you are comfortable with and withdrawing the same amount each month. Think about your potential expenditure in advance and withdraw only what you need. 

If you withdraw too much, it is likely to sit in your cash savings account where it could lose its effective value in real terms, when measured against inflation.

Be mindful of stock market movements too. During falls in the market, you will need to sell more units to realise the same level of income. This can deplete your fund more quickly than you realise if you don’t remain vigilant.

4. You’ll also need to consider your longevity

One of the most important factors to consider when managing pension decumulation is your life expectancy. How long might your pension pot need to last and will your current budgeting plans allow for that length of payment?

At The Pension Planner we can help you maintain your financial resilience during a lengthy retirement so contact us if you need advice.

Get in touch

If you’d like help managing or planning your pension decumulation, we have the expertise to help you, so please get in touch. Email or call 0800 0787 182. 

Please note:

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. 

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