Midweek Money: The Fixers: Retirement is a risky business

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NOW IS not a good time to be retiring. Of course there may not always be a choice, but in financial terms, retirement could hardly come at a worse moment. Not only is the stock market very uncertain, therefore affecting the value of the pension fund that buys the annuity or income for life, but annuity rates have dropped dramatically in the past few weeks. All this represents a double hit for those who have saved all their lives in order to enjoy their leisure time.

There is not much that can be done about the state of the stock market. A smaller fund means that the income for the rest of someone's life will be reduced. Also, deciding on an annuity means that the rate of income is once again fixed for the rest of an investor's life. Is there a solution?

Delia was in exactly this position. She had decided that she wished to retire about a year ago. Her pension fund was pounds 120,000 and available to purchase retirement benefits. She also had a capital sum that would provide an increased income for her. Delia plans to enjoy her retirement. She would like to travel, visit friends, spend more time with her family and she wishes to make some home improvements. Having earned a good income, she is having to readjust her sights and realises that she is not going to be as financially well off as before retirement. However, with both financial and personal planning, the negative effects of a reduced income can be controlled.

We looked at the draw-down option in place of taking an annuity. A draw- down arrangement is where the money stays invested, but the client can take an income. The advantage is that if investments perform well, the income can increase. Also, it means that an individual can delay fixing on an annuity until times are better, although no later than 75. The disadvantage is that if investment performance falters, this means a cut in income and there is no guarantee that annuity rates will increase.

However, it is certainly worth considering and working through the figures to see whether the increased risk is advisable. In the end, Delia decided that opting for draw-down was too risky. This was correct as she has other monies which are invested and therefore already subject to the ups and downs of the stock market. No doubt her view on this was coloured by the recent downturn in the market.

So looking at a spread of investments we were then back to an annuity. The best arrangement that we could find at the time was a level annuity of pounds 8,500 from Norwich Union. We decided on a level annuity as it takes some time for increasing annuities to catch up and there is the benefit of having the money earlier. In addition, the extra lump sum investments that Delia has would enable her to take an increasing income in the future.

However, there is a third option which worked well for Delia. That is to consider a with-profits annuity. Looking at the with profits annuity figures, we discovered that Delia can take an income of some pounds 9,500 for the rest of her life. In order to maintain this income, the pension fund must achieve a growth rate of only 6 per cent a year, net of charges.

Thus, as far as risk is concerned, Delia is treading a middle road between the guarantee of an annuity, and the more extreme positives and negatives of a draw-down by opting for the with-profits annuity.

Once again this shows the benefits of looking at all the options. It is essential to look at a person's complete financial circumstances, particularly at such a crunch time as retirement. Even in these troubled times, there are workable options for those facing retirement.

Amanda Davidson is a partner at Holden Meehan, independent financial advisers (0171 692 1700)