5 questions to ask before taking flexible pension payments

Are you close to retirement? Do you want to know what questions you should ask before taking flexible pension payments? Read this article to find out.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Happy retired couple on a yacht

Image source: Getty Images

If you are nearing retirement, you’ll need to start thinking about your future income when you stop working. This article covers three steps you should take and five key questions you should ask before taking flexible pension payments, according to Hargreaves Lansdown.

Things to do beforehand

It’s a good idea to start planning your retirement at least two years before your retirement date. Before deciding on your pension drawdown method, there are three steps you should consider taking.

Inflation Is Coming

Inflation is out of control, and people are running scared. But right now there’s one thing we believe Investors should avoid doing at all costs… and that’s doing nothing. That’s why we’ve put together a special report that uncovers 3 of our top UK and US share ideas to try and best hedge against inflation… and better still, we’re giving it away completely FREE today!

Click here to claim your copy now!

1. Put together an emergency fund

According to Nathan Long, senior analyst at Hargreaves Lansdown, it’s a good idea to have an emergency fund large enough to pay for one to three years worth of expenses in an easily accessible account.

This may seem like a large amount, but remember that you will be on a fixed income. It will be important to have some extra financial insurance just in case.

2. Make sure you understand your options

It is important that you understand how pension drawdown works. In addition, make sure you understand the alternative options available to you, such as buying an annuity.

If you are unsure about your options, it might be worth seeking financial advice. For more information on how to find a financial adviser, check out our step-by-step guide.

3. Know what you want from your retirement

Think about what you want from your retirement and how much it will cost. This might include living in a different area or taking up new hobbies.

It is important to think through your plans carefully because they will have an effect on your expenses. For further information, check out our article on tips for planning your retirement income.

[top_pitch]

Five questions to ask before taking flexible pension payments

Before taking flexible pension payments, there are five questions you should consider.

1. How much do you need to live on?

The amount you will need to live on will be influenced by two basic types of expenses:

  • Essential expenses – including housing, groceries, utilities, medication and local transport.
  • Non-essential expenses – including holidays, socialising and hobbies.

It is likely that your expenses will change with retirement. For example, you won’t have any housing expenses if you’ve paid off your mortgage. Similarly, your transportation costs could fall if you are no longer doing the daily commute.

2. How can you make your pension last throughout retirement?

According to Hargreaves Lansdown, one common way to do this is to stick to spending the natural yield of your investments. If you only spend the natural yield, your pension pot will remain untouched and will continue to generate an income throughout your retirement.

A typical yield is around 3% to 4% of your pension pot every year. So if you have a pension pot worth £500,000, the maximum yield will be £20,000.

Be aware that if you decide to take larger flexible pension payments, there is a risk that you could run out of money. This is an even higher risk if the yield falls, which could happen during an economic downturn.

It is better to use an emergency fund as income during a market downturn instead of your pension.

3. Where should you invest the money?

If you have the right asset mix, your pension should be able to withstand any market volatility. Reviewing your portfolio every year will ensure you do not withdraw more than the natural yield.

Keep an eye on annuity rates as you get older. They tend to improve with age and you could decide to buy one later on.

You could adopt a blended approach, using an annuity for your essential expenses and flexible pension payments for non-essential expenses.

4. How should you take account of dividend fluctuations?

It is better to focus on the natural yield rather than changes in dividends. In any case, history shows that dividend payouts recover fairly quickly if they do fall. An emergency fund can be used to supplement any possible shortfall.

5. How should you take account of market movements?

If you have diversified your portfolio, this will protect you from extreme market volatility. If the market does fall, it is important to wait it out rather than panic sell. You can use your emergency fund in the meantime.

[middle_pitch]

Take home

With careful retirement planning, you will be prepared for any market uncertainty. You will be free to spend your retirement doing things you enjoy rather than worrying about your income.

More on Personal Finance

Note paper with question mark on orange background
Personal Finance

Should you invest your ISA in a model portfolio?

Which model ISA portfolios offer both high performance and low fees? Hargreaves Lansdown, Interactive Investor and AJ Bell go under…

Read more »

Economic Uncertainty Ahead Sign With Stormy Background
Personal Finance

Is it time to exit emerging markets investments?

Investors may well be sitting on losses from emerging markets funds. Is it worth keeping the faith for a sustained…

Read more »

Personal Finance

Share trading? Three shares with turnaround potential

Share trading has been difficult in 2022, but which companies have turnaround potential? Jo Groves takes a closer look at…

Read more »

Man using credit card and smartphone for purchasing goods online.
Personal Finance

Revealed! Why Gen Z may be the savviest generation when it comes to credit cards

New research reveals that Gen Z may be the most astute when it comes to credit cards. But why? And…

Read more »

Environmental technology concept.
Personal Finance

The 10 best-performing sectors for ISA investors

The best-performing sectors over the past year invested in real assets such as infrastructure, but is this trend set to…

Read more »

Road sign warning of a risk ahead
Personal Finance

Recession risk ‘on the rise’: is it time for investors to worry?

A major global bank has suggested the risk of a recession in the UK is 'on the rise'. So, should…

Read more »

pensive bearded business man sitting on chair looking out of the window
Personal Finance

1 in 4 cutting back on investments amid cost of living crisis

New research shows one in four investors have cut back on their investing contributions to cope with the rising cost…

Read more »

Image of person checking their shares portfolio on mobile phone and computer
Personal Finance

The 10 most popular stocks among UK investors so far this year

As the new tax year kicks off, here's a look at some of the most popular stocks among UK investors…

Read more »