PensionsJun 20 2013

When to begin looking at retirement income options

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A client should begin thinking in depth about their retirement income position around a decade before they plan to take the income, all our experts agreed.

Fiona Tait, business development manager at Scottish Life, added that in an ideal scenario clients would start by estimating the level of income they require to maintain their preferred standard of living and work backwards to the amount they need to invest to achieve it.

“More usually clients start with the amount they think they can afford to save and find out how much this will buy them just before they are due to stop work.

“Given increasing longevity and falling annuity rates this discovery can be a bit of a reality check; for some it’s a nasty shock. The earlier the client focuses on end income the greater the chance of redeeming the situation.”

Working out how much a client will have saved in the run up to retirement can effect the question of which type of investment should they have.

Consideration should be given to whether it is possible and necessary to increase contributions and whether investments should be reviewed and changed as retirement nears, advises Andrew Tully, pensions technical director at MGM Advantage.

Some clients’ funds may be invested in a default investment lifestyle profile, automatically moving clients investments into lower risk assets in preparation for buying an annuity.

However, if the client is likely to go into income drawdown they will likely have completely different investment needs, points out Alastair Black, head of customer income solutions at Standard Life.

“It’s important to review and adjust the distribution of your clients’ assets in the run up to retirement taking into account likelihood of purchasing an annuity or income drawdown - or a mix of the two.”

It makes sense for the position to be kept under regular review as retirement nears.

For example, explains Mr Tully, if annuity purchase is likely, “it may be advisable to gradually move investments away from equities to less volatile assets.

“But this isn’t likely to be suitable for those who want to utilise income drawdown as the investment horizon may be extended by 10 or 15 years.”