Helping you make sense of your options

These three articles explore some areas you might want to consider when approaching retirement.

AV393647_AR10025_0220.indd 1 1/30/20 10:15 AM

How you decide to fund your retirement is no longer just about thinking about buying a guaranteed income, or taking withdrawals from your funds. It’s about looking at retirement holistically and considering all the options available to you.

This may be generating income from your pension savings, but equally it could be continuing to work, thinking about equity release, or factoring in a rental income or an inheritance. Retirement these days is best considered as a phased approach, as your needs change over time.

What options do I have?Here are some of the ways that you may generate income over your retirement years:

l Pension savings

l Downsizing

l Equity release

l Part-time or full-time work

l State pension

l Other savings and investments

l Rental property income

l Inheritance

The right choice is personal; there is no single solution that works for everyone. So how do you reach the right conclusion for you? One place to start is your pensions savings and the options available to you.

Know your defined contribution pension savings options The options you have when it comes to defined contribution pensions savings are perhaps less complicated than you think. You can normally access your money from age 55, and there are only five options:

A Keep your savings invested. Take a flexible income or lump sums from your pension savings. This is often referred to as Income Drawdown.

B Buy a guaranteed income for life, also known as an annuity, with some or all of your accumulated savings.

C Choose a mix of A and B.

D Take the whole lot in one go.

E Take small cash sums.

Whichever option you choose, you can usually take up to 25% of your pension pot as tax-free cash. How and when you can do this, and the effect it will have on your income in retirement, will depend on the option you choose. Tax rules may change in the future and how they apply will depend on your individual circumstances.

2 3

Knowing your options

The right choice is personal;

there is no single solution that works for everyone

AV393647_AR10025_0220.indd 2 1/30/20 10:15 AM

2 3

Not all pension scheme providers will offer every option, and terms will vary between providers, so shopping around will be required to get the best deal for you. These options may also leave you with questions; Should I take withdrawals from my pension savings, buy a guaranteed income, or a mix of both? If I do choose an Income Drawdown, how much can I afford to take each year, without running out of money? How much risk can I afford to take, and am I happy with the value of any remaining pension savings going up and down in value?

Before you decide which option best suits your needs, there are a number of factors that should be considered. For example, your expenditure, how much risk you can afford to take, how long you might live and what other options you have available. The impact of tax should also be considered, and what the impact may be for any beneficiaries. It’s also really important to consider how your spending and needs may change over time, and how your options can be changed to suit you.

Please note a defined benefit pension would work differently. A defined benefit pension is one through which an employer/sponsor promises a specified pension payment upon retirement that is predetermined, based on how many years you have worked for the company and your salary.

Your adviser will be able to tell you more about how these types of pensions work and will be able to let you know which type of pension you have if you are unsure. They will also be able to help you understand your options at retirement and what you need to consider before making a decision.

For more information about your options at retirement, please visit Pension Wise. Pension Wise is available for anyone over 50, has been set up by the Government to offer free and impartial guidance for people retiring with defined contribution pensions and can help you understand your options. You can contact Pension Wise through their website, over the phone or face to face.

https://www.pensionwise.gov.uk/en

0800 138 3944

Should I take withdrawals from my pension

savings, buy a guaranteed income, or a mix of both?

AV393647_AR10025_0220.indd 3 1/30/20 10:15 AM

A key aim for anyone in or approaching retirement is to have enough income to cover what they spend.

When it comes to spending, there are two distinct types:

l Fixed expenditure

l Discretionary expenditure

Fixed expenditure is by far the most important. Fixed expenditure covers the basic costs of living, for example, food, gas, electricity and rent. You cannot afford to do without any of these essentials, so you should prioritise these when thinking about how you match your income against your expenditure.

Fixed expenditure could be matched off against a guaranteed income for life. For example, a defined benefit pension from your current or former employer(s), or a guaranteed lifetime income bought from an insurance company (with a defined contribution pension pot).

Discretionary expenditure is spending over which you exercise choice, for example, eating out, going to the cinema, holidays and so on. These costs, whilst important to our overall quality of life, are not essential.

When it comes to discretionary expenditure, could you afford to choose a retirement option that allows you to take more risk and potentially get your savings to work harder for you? You should only do this if you are comfortable taking risk. In practical terms, if taking risk pays off, you might be able to do more e.g. eat out more often or take two foreign holidays rather than one. However, you should be aware that if the risk does not pay off this could significantly limit your expenditure and mean you will not be able to do as much.

4 5

Understanding spending habits

Fixed expenditure

covers the basic costs of living

Discretionary expenditure

is spending over which you exercise choice

AV393647_AR10025_0220.indd 4 1/30/20 10:15 AM

4 5

As mentioned in the first article, there is a range of ways to fund your retirement which you should consider. Some of these may involve more risk than others. For example, if you decide that Income Drawdown is the best option for you, then your funds will be invested, and you will be exposed to investment risk.

You need to think about risk in two ways.

1. Your capacity for lossCapacity for loss, in the context of retirement income, is your ability to sustain an investment loss but still be able to cover your fixed expenditure needs. Your financial adviser will be able to help you understand your capacity for loss.Here is an example that illustrates how an investment doing badly could impact income:

Someone had a pension pot of £100,000 and once they retired, they decided to take a regular income from it using income drawdown. If they needed the income to last 25 years, they would be able to withdraw £4,000 a year.

However, if before starting income drawdown, the investments in the pension had performed badly and the value of their pot had fallen to £75,000, they would only be able to extract £3,000 a year. If they continued taking £4,000 a year their pot would run out more quickly.

Could you weather a £1,000 fall in income without it making a big difference to your standard of living? For some people, the answer to this question will be yes, and for others, the answer will be no.

If a £1,000 reduction in income meant that the person in this scenario would not be able to meet their fixed expenditure, then their capacity for loss may be very low or even nil.

If, however, a £1,000 reduction in income meant they just had to cut back on some luxuries and they were happy to do this, then they may have a higher capacity for loss.

If you have a low capacity for loss, then you may want to consider covering your fixed expenditure, or even your discretionary expenditure, with income that is guaranteed for life. This could be true even if you are personally comfortable with taking investment risk.

If you have a higher capacity for loss, then you may be able to take more investment risk. But that doesn’t mean you have to take more investment risk if you are not comfortable doing so.

In our example we assumed there was no investment growth or loss in the future. In reality, the funds would be invested, and the value could go up or down at any point throughout retirement, so there is a risk the income may not last as long as planned.

Risk: How much can you afford to take?

Capacity for loss, in the context of retirement

income, is your ability to sustain an investment loss

AV393647_AR10025_0220.indd 5 1/30/20 10:15 AM

6

2. Your attitude to riskAttitude to risk is the other aspect of risk that you need to think carefully about.This describes how comfortable you feel personally when taking investment risks.

There are a number of ways in which you can determine your attitude to investment risk. For example, you could complete a risk questionnaire which predicts what sort of investments you would be comfortable investing in.

You might also adopt different attitudes to risk in relation to different goals. For example, you might adopt a very low attitude to risk when it comes to covering fixed expenditure, but a higher attitude to risk when thinking about discretionary expenditure. Your financial adviser will be able to help you identify your attitude to risk.

Investments are usually split into different risk categories ranging from low to high. The following table shows the descriptions of the different levels of risk we assign to our investment funds at Aviva. This may help you understand some of the differences between different levels of risk. Similar tables are widely available, but bear in mind these may differ from each other, so regard the following as a rough guide.

Risk level Types of investment

Low

Low risk investments usually aim to provide returns similar to those you would get from deposit and savings accounts, although there may still be a risk that the value of your investment could fall.

Low to medium

Investments that are expected to provide better long-term returns than savings accounts. These funds typically invest in high-quality corporate bonds or provide a form of guarantee or capital protection, although there is still a risk the value of your investment could fall.

Medium

Investments that have the potential for better long-term returns than lower risk funds, although there’s a risk the value of your investment could fall. Generally, this involves investing in a diversified mix of assets including shares and commercial property and in lower quality corporate bonds issued by companies that have a higher risk of defaulting.

Medium to high

Shares (equity) of larger and well-established companies. For example, shares of companies listed on the UK main market or other major stock markets. Fund prices may fluctuate significantly but offer the potential for good returns over the long term.

High

Higher risk sectors. For example, emerging market shares or specific themes, such as new start-up companies. These investments offer the greatest potential for long-term returns, but the highest price fluctuations and risk of losing money.

Although you may be attracted by the higher potential returns of higher-risk investments, you should be aware there is also a higher potential for losses. If you invest in these and they sustain large losses, it could have a significant impact on your circumstances and quality of life. People whose personal tolerance to risk is lower should consider choosing investments where the risk of loss is lower, even if the potential for returns is also lower.

And, regardless of your personal attitude to risk, you should avoid higher risk investments if your capacity for loss is low.

Attitude to risk describes how comfortable

you feel personally when taking investment risks

AV393647_AR10025_0220.indd 6 1/30/20 10:15 AM

AR10025 02/2020 © Aviva plc

Aviva Life & Pensions UK Limited. Registered in England No. 3253947. Registered Office: Aviva, Wellington Row, York, YO90 1WR. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Member of the Association of British Insurers. Firm Reference Number 185896.

aviva.co.uk

For more information about what we have discussed in these articles, please speak to your financial adviser. You may be charged for financial advice.

If you are an adviser and you want more information about retirement solutions from Aviva, speak to your usual contact or visit aviva-for-advisers.co.uk

AV393647_AR10025_0220.indd 8 1/30/20 10:15 AM