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Since April 2015, pension savers have been able to choose between buying an annuity and receiving a standard investment income.  Getting this decision right can make a huge difference to a person’s retirement.  That’s why the government is taking steps to ensure that those on the point of retirement are well-informed.

From pensions freedoms to pension information

Up until 2015, people with pension funds only had two decisions to take.  Firstly, they had to decide how much of their pension pot they wanted to take as a cash lump sum.  Secondly, they had to pick the right annuity for their needs and wants.

These were both important decisions with serious implications for a person’s future.  As such, it was best to take them with the help of a professional adviser.  Once those decisions were taken, however, the person had nothing more to do.

With pensions freedoms, however, an individual could potentially have to take investment decisions right up to the point of their death.  What’s more, pension pots can now be passed from one generation to the next.  This means that they may need to be included in estate planning discussions.

As a result, modern pensioners need to be well-informed.  Ideally, they should have professional financial advice.  Some people, however, may not be able to access this.  In fact, even now, some people may not really understand the full implications of the decisions they take regarding their pension.  Fortunately, the industry is now obligated to help.

New default investment paths

The government has defined four new “pensioner personas” based on what people intend to do over five years.  It has instructed providers to create standardised investment pathways for them.  Here is a quick overview of the four current personas” and what they are likely to be offered.

People expecting to withdraw their cash

Some pensioners might want or need to use up their established pension fund quickly.  For example, they might have debts to pay off.  These people are unlikely to be able to withstand the ups and downs of the stock market.  They are, however, potentially likely to want access to their funds at relatively short notice.  For this reason, they will probably be directed towards cash.

People expecting to buy an annuity

Some people might like to keep their pension fund invested during the early stage of their retirement.  This will allow them to grow it a bit more before they purchase an annuity.  These people are likely to be directed towards funds invested in gilts (bonds issued by the UK government) or very safe bonds.  These offer better returns than cash but are still very low risk.

People expecting to start drawing an income

Assuming interest rates stay on the low side, providers will probably be forced to recommend stocks.  They are likely to be very cautious in their picks to minimise the risk of investors losing their capital.

People who wish to keep growing their fund

With a five-year investment horizon, providers are almost guaranteed to recommend stocks.  They will probably stay relatively cautious but may be prepared to pick some riskier options if they show promise.

The problem with template solutions

These default pathways may help to stop pension-fund holders from making wildly inappropriate decisions.  They do not, however, ensure that pension-fund holders make the best decisions for them.

Likewise, they do not and cannot address many of the other challenges facing modern retirees, such as tax planning.  One of the great advantages of annuities was that they were very easy for HMRC to understand and process.  Using income drawdown, on the other hand, can make filing taxes a lot more complicated.

In short, while these default templates may be better than nothing, it is still far better to get individual financial advice.  Ideally, you should have a regular appointment with a financial advisor.  You should certainly look to consult them before taking any important financial decision.


The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.

HM Revenue and Customs practice and the law relating to taxation are complex and subject to individual circumstances and changes which cannot be foreseen


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