In 2014, the UK Government announced radical proposals which allow people to withdraw money from their pension pot from age 55, subject to their marginal rate of income tax in that year. The main effect of this change is to remove the obligation to annuitise at any future age and hence puts more onus on individuals to ensure they manage their resources appropriately and plan ahead.
This paper is concerned with how individuals can best use their pension pots to align them with their own personal financial objectives and longevity risks. It finds that, for most people, annuitising at retirement is not the best option and that income draw-down is preferable, especially where there is a bequest motive and/or the individual has other valuable assets such as property.
Section 2, asks what the effects of the new flexibilities are likely to be on the decision to buy an annuity by aligning their decision to their retirement strategies. Section 3, deals with two types of longevity risk, referred to as the selection effect and longevity drift, and the difference that these will make to future financial planning.
The paper concludes by considering these measures alongside a person’s state of health, living with or making financial provision for a partner, gifting or making bequests and so on.