Retiring: the money decisions that cannot be undone

The decisions made at the point of retirement are among the largest and least reversible in personal finance, and are frequently made with less research than a car purchase.

The main choices

Where defined contribution pensions are involved.

An annuity, providing a guaranteed income for life.

It removes investment risk and the risk of outliving your money, and it is generally irreversible.

Rates depend on age, health, interest rates and the options chosen.

Drawdown, leaving the money invested and withdrawing flexibly.

It retains flexibility and inheritance potential and leaves you carrying investment risk and the risk of running out.

Lump sums, taken in whole or in part, with tax consequences that vary.

A combination, which many people find appropriate — securing essential expenditure with guaranteed income and keeping the remainder flexible.

And deferring, which increases later income in some arrangements.

The options within an annuity

Which materially change the value and are frequently not considered.

Single or joint life, where a joint annuity continues to a spouse and pays less initially — and where choosing single life without discussing it with a partner has serious consequences.

Level or increasing, where an increasing annuity starts lower and protects against inflation over a long retirement.

Guarantee periods, which pay for a minimum term regardless.

And enhanced or impaired life annuities, which pay more for people with health conditions or lifestyle factors — a substantial number of people qualify and do not ask, which is one of the most commonly missed opportunities in retirement planning.

Shopping around

The single most valuable action.

You are generally not obliged to take an annuity from your existing pension provider, and the difference between the best and worst rates available is substantial.

The open market option exists precisely for this and is under-used.

Disclosing health conditions and lifestyle factors can increase income meaningfully.

And comparing across the market takes a short time for a decision that lasts the rest of your life.

Drawdown risks

Which need understanding.

Sequence risk: poor investment returns in the early years of drawdown do disproportionate damage, because withdrawals crystallise losses.

Longevity risk: living longer than the money lasts.

Withdrawal rate: rules of thumb exist and are contested, and sustainable rates depend on returns, inflation, fees and how long you live.

Investment charges, which compound.

And the requirement to make ongoing decisions at ages when doing so may become harder, which is an argument for securing at least essential income with something guaranteed.

Tax

Which varies enormously and matters.

Tax-free lump sum entitlements exist in several systems, with limits.

Withdrawals are generally taxable as income, which means taking a large amount in one year can push you into higher rates.

Spreading withdrawals across tax years is frequently more efficient.

Emergency tax codes are commonly applied to first withdrawals, producing overpayment that must be reclaimed.

And the interaction with other income and with means-tested benefits needs checking.

The state pension

Which underpins everything.

Check your contribution record for gaps well before retirement, since voluntary contributions to fill them are frequently excellent value and there are deadlines.

Check the age at which it becomes payable, which has risen in most countries.

Deferring increases the amount in some systems.

And check entitlement to any additional pension-age support, which has particularly poor take-up.

Free guidance

Which exists and is barely used.

Several countries provide free, impartial pension guidance services, sometimes with an appointment, specifically to help with these decisions.

Some systems require providers to signpost or book these appointments.

Regulated advice is worth paying for given the sums involved and the irreversibility.

And using neither is the most expensive option, since the decisions are large and the differences between good and poor choices are substantial.

Pension scams

Which cluster at exactly this point.

Features: unsolicited contact; offers of early access; promises of unusually high returns; overseas or unusual investments; pressure to act quickly; and offers of a free pension review from someone who contacted you.

Transfers into scam arrangements have cost people entire pensions with no recovery.

Checking the firm on the regulator's register, refusing unsolicited approaches entirely, and taking regulated advice before any transfer are the protections.

The non-financial part

Worth mentioning.

Retirement affects identity, routine and social contact as well as income, and the transition is frequently harder than expected.

Phased retirement, part-time work and volunteering are common and effective transitions.

And the financial plan should reflect what you actually intend to do, since spending patterns in early retirement are frequently higher than later.

General information only, not financial advice. Retirement decisions are largely irreversible — use free government guidance services and consult a regulated adviser.