Taking Care of Your Dependants During Retirement

If you are single, then planning for your twilight years becomes a relatively easy task.

You just have to ensure that you follow the recommendations made by your pension provider and create a right mix of investments which should provide you with a fixed monthly income for the rest of your life.

But if you have a spouse, an ageing parent or children to provide for, then your retirement plans must make provisions to ensure that the income you receive must be enough for them as well.

Also, you must consider the fact that they might live on after your death, requiring a stable income for the rest of their lives. Factors like your current health, healthcare costs and increased life expectancy should be a deciding factor when you plan your retirement income if you have dependants.

There are multiple ways to do this and you must ensure that you consider the pros and cons of each option before you select it.

Nominate before retiring

If you have a defined benefit pension scheme at your workplace, such as a final salary or average career scheme, then it allows you to choose one or more nominees to receive your pension pot, if you were to pass away before retiring.

Ensure that you fill this form beforehand. You may also need to update the information in this form or change the names if your financial or familial circumstances change.

Plan your finances 

Depending on the type of pension plans you have invested in and the amount of pension you have accumulated, you can get a good idea of the amount you can receive each month.

You can use online tools like Pension Calculators or use the services of a financial expert to get a better idea.

In addition to this, your spouse or civil partner may have a pension pot of their own.

Plan how you can use the pension pot to provide an income that allows the two of you to live comfortably. Once again, either partner can nominate the other to inherit the pension, in the event of death.

After the introduction of new reforms in April 2015, you now have multiple choices to access your pension pot.

Read our article – Options for using your pension pot

Invest in an annuity

You can choose to take 25% of your pension pot as a tax-free cash amount. The rest can be used to purchase an Annuity.

An annuity will provide you with a fixed monthly income for you and your spouse for the rest of your lives.

There are different types of annuities and ensure that you choose one that can provide for your dependant after your death.

  1. Joint Life Annuity: If you choose a Joint life annuity, any financial dependant or nominee you choose will continue to receive an income in the event of your death.  (In most cases, for the rest of their lives). It can also be used to pay your dependent children until they reach the age of 23. The income your beneficiary will receive after your death will depend on the income paid out to you while you are alive. The lesser you choose to be paid while you are alive, the more your dependent beneficiary will receive and vice-versa.
  2. Guarantee Period Annuity: A guarantee period annuity will pay you a fixed income for a guaranteed period of time. This may be 5 or 10 or 15 years depending on the scheme you choose. So, if the annuitant (a person whose pension was used to buy the annuity) dies five years into the period, the dependent person will receive the guaranteed income for the remainder of the term. However, if your partner or spouse outlives this term, they will not receive the income. There is also an option to buy a Joint annuity together with an annuity.
  3. Capital Protected Annuity: A capital protected or value protected annuity will pay your dependant a lump sum cash amount rather than a monthly income, after your death. The cash amount will be the remainder of the pension pot after deducting the income already paid out to you before your death.


Options For Using Your Pension Pot

Thanks to the sweeping new pension reforms introduced in April 2015, you now have more flexibility than ever to access your pension pot.

Yes, you can choose from multiple options when it comes to accessing the funds in your pension and even choose a combination of options.

So if you are 55 years of age or have a protected retirement age and are legally entitled to your pension funds, then you now have complete control over how and when you choose to access your pension.

But irrespective of whether you plan to continue working, reduce the number of working hours or to retire fully, it is important that you plan wisely and choose the right option or combination that will give you and your dependants a stable income throughout your golden years.

Keep the Pension Pot Untouched

If you are one of the smart ones who started saving early for your retirement and has a supplementary source of income thanks to healthy investments, then you may choose to delay accessing your pension pot.

This applies to you even if you wish to continue working and have a stable monthly income at this point in time.

Delaying access to your pension pot has its advantages. Your Pot will continue to attract tax relief and will grow over time, providing you with a potentially higher income when you eventually access it.

You may need to review your investment choices though, especially if you are close to retiring. Moving the investments to safer investment choices is the expert recommended option.

Do check with your pension provider if there are any restrictions or charges if you delay your retirement date.

RELATED: How to Identify a Pension Scammer

Buy an Annuity

A quarter of your pension pot can be taken as a tax-free cash lump sum. The rest can be used to buy an annuity which will provide you with a monthly income for the rest of your life.

There are two different types of Annuities.

An annuity can also be used to set up a lifetime income for a dependent person or a beneficiary after your death.

Flexi-Access Drawdown

This is one of the newer ways of accessing your pension funds to create a monthly income.

Once again, you can choose to take an amount (25% or whatever you allocate for drawdown) of your pension pot as a tax-free cash lump sum and reinvest the rest of the amount into funds.

You can set your desired income level, and it can be altered or adjusted based on how well your investments perform.

Unlike an annuity, Flexi-Access Drawdown does not give you access to a lifetime guaranteed income. Also, your investments need to be managed with care.

From choosing a variety of investment options (Low and high risk) to using the remainder of the funds like a bank account and making periodic withdrawals, Flexi-access drawdown has its advantages.

Withdrawing Cash Sums when you need it

If you have an urgent requirement for cash, then you can make withdrawals from your pension pot. Apart from the first quarter which is tax-free, every withdrawal may incur charges and will be treated as taxable income.

There may also be limits to the number of withdrawals you can make each year.

Cash-in the entire pot 

The last option is to cash-in your entire pension pot which is considered to be an extremely risky option.

25% of the pot will be tax-free while the remainder will be taxed at your highest rate.

Here are some of the obvious risks of cashing out your entire pension pot.

  • No regular income for you or your dependant
  • Chances of incurring a huge tax bill
  • You may exhaust the entire cash pot
  • You will be left with no income during the later stages of your retirement

If you plan to cash-in your entire pension pot, then we recommend that you get professional financial advice before you do so.

If you still have questions in mind, you may look at our Complete Pensions FAQ.