Shiny new bike or shiny new Xbox?
ONE of the sadder things I've noticed about recent Januarys is that the streets are empty.
These are streets that used to ring with the sound of children's laughter, as they zipped around on the shiny new bikes they'd got for Christmas. Today they're all indoors, playing on a shiny new Xbox instead.
Pension savers have also had a gift in recent years, in the shape of the new pension freedoms they have enjoyed since 2015, and they are taking up their new options with great joy.
In fact, those lovely tax people at HM Revenue and Customs said this month that during 2017, savers took out £6.5 billion from their pensions, under those very pension freedoms.
These big numbers don't mean much when used on their own, they just leave most people a little bamboozled and thinking ‘Isn't that a lot?'
They are, however, useful when comparing to previous years, because they can reveal interesting patterns of behaviour. In this case, we can compare to 2016, when the figure was £5.7bn. In other words, withdrawals were up around 15 per cent last year.
So, three years on, we are beginning to get a handle on how the option on taking money out – or ‘drawdown' – is taking off.
You can tell something has really caught on when the industry invents a nifty new phrase to describe it. Use of the pension freedoms has been dubbed ‘the dash for cash', and savers are embracing the option – at least in terms of enthusiasm.
What we don't know yet is how wisely that money is being put to use, to do what it was designed for in the first place: give us security in retirement. In order to achieve that security, I am reminded of the old song lyric ‘It ain't what you do, it's the way that you do it.'
Using drawdown is a complex process, and good advice, particularly around tax issues, is essential when considering one of the most important decisions of your financial life.
This is why many people prefer to increase the level of security they have by opting for the more traditional pensions annuity, a product which turns your pension into a monthly income guaranteed for life.
Now, at the risk of stating the obvious, when you opt for a standard annuity, it is a purchase. I mean that you've signed on the dotted line, and there's no refund – another reason why advice on getting it right is crucial. You have peace of mind until you die, but some people worry about the risk that if they die young, their cash is gone, and they and their family didn't really get ‘value for money' out of the annuity.
They wonder did they lose out on value they could have had if they had, say, gone the drawdown/reinvestment route, for example, shifting part of their savings into investment funds.
But it doesn't have to be that way! You could go for a ‘value protected annuity' which, when you finally ‘kick the bucket' would give your family a bucketful of cash, and return most of your original savings.
Proof of the continuing appeal of annuities came this month, when Legal and General said they are introducing a series of new annuity products this year.
So what suits you better? Draw down cash from your savings to spend or reinvest, go for total peace of mind with an annuity – or a bit of both with the value protected model?
Shiny new bike or shiny new Xbox? They are very different, and it's crucial to get the decision right - you won't shoot many aliens with a bike, or get very far up the road sitting on an Xbox.
:: Michael Kennedy is an independent financial adviser and pensions specialist and can be contacted on 028 7188 6005