Use the new pension freedoms to boost your retirement income

Video: Fidelity's Alan Higham believes people could boost their pension income with the new freedoms announced in the latest budget

Prime Minister David Cameron talks to pensioners and older working people at Age UK headquarters on October 14, 2014 in London, England. (Peter Macdiarmid - WPA Pool | Getty Images)

People approaching retirement could considerably boost their pension income by making clever use of the new pension freedoms announced in the last Budget.

That’s according to Alan Higham, retirement director at Fidelity Worldwide Investment.

“The method is simple,” he says, but the implementation isn’t,” he warns.

Here’s his simple plan that could work for those reaching State Pension age before 6 April 2016, (in other words men aged 63 or women aged 61 or over at April 2014):

• Don’t buy an annuity to top up State pension
• Don’t draw State Pension at State Pension age
• Spend your private pension to cover your income needs
• Once private pension exhausted then start State Pension

What’s the benefit? Here’s a simple example of the impact: A £40,000 fund might buy an inflation-linked annuity of £1,400 a year for a 65-year-old which when added to, say, a £7,000 State Pension gives £8,400 secure inflation-linked income for life.

Using Alan’s approach, that 65-year-old could draw £9,800 income, increase it with inflation and be able to maintain that once their pension fund has depleted using just State Pension. “So you’d get £2,800 a year for life extra as a result rather than £1,400 from buying an annuity,” Alan says.

Still confused? The Independent’s Personal Finance Editor Simon Read went to the City to talk to Alan to find out exactly how the proposals work, and who they could work for.

But as Alan warns in the video, it’s essential to get professional advice before making any decisions about your pension arrangements.