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‘With the home providing financial security and also a source of funds to bequeath, this person may choose income drawdown based on their shorter life expectancy,’ said Mayhew. Person 7: they have access to housing equity so could gift money early knowing they have the opportunity to release equity later. ‘In principle they could gift money before death, but they may leave themselves short of cash unless they buy an impaired annuity.’ ‘The main danger is using up all of their assets before they die with nothing to pass on,’ said Mayhew. Person 6: is in an ‘awkward position’ because they want to leave money behind but do not own a home and are in poor health. ‘They may be able to secure an impaired annuity at a higher rate, but they are probably better off using a combination of income drawdown and equity release,’ he said.
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This allows them to take more financial risk, said Mayhew. Person 5: is in poor health and a homeowner. They could withdraw money while they are still alive to help their children but ‘they could also purchase a joint annuity with their partner so that both their income needs are met even after one dies’, said Mayhew. Person 4: is the same as person 1 but wants to pass money on. ‘With a mortgage-free home, drawdown is likely to be a better option, since they can always release equity from their home later.’ ‘If they have outstanding mortgage, they could use some of their pot to pay this off,’ he said. Person 3: the same as person 1 but owns a home. If they can buy an enhanced annuity this is the best option but ‘if this is not available to them, then drawdown is likely to be a better option’, said Mayhew.
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Person 2: is like person 1 but in poor health so their life expectancy is reduced. This means they would be best to annuitise ‘unless they have a very large pot that is unlikely ever to be exhausted'. Person 1: has good health, no home so they must pay rent, but no ‘bequest motive’. Source: International Longevity Centre-UK The following chart should help individuals determine whether turning the pension into cash, buying an annuity or going into drawdown is the best option: Person type Under the new rules individuals can pass on their pension to whoever they like, as long as it is in drawdown, while annuities cannot be inherited. ‘However, if the individual’s health or mobility has deteriorated, equity release may be a more practical option.’Īnd finally, those wanting to pass money on to children or grandchildren should take this into consideration when retiring. ‘Downsizing can be a source of additional funds as long as there is no significant debt,’ said Mayhew. The average homeowner aged 65-plus in the UK has £122,000 of equity in their property ‘which is much higher than the average pension pot’. If a retiree is a homeowner, this provides more security as they could release equity from their home to supplement their pension if they need to. Those in poor health received better annuity rates through ‘enhanced annuities’, also known as 'impaired annuities', because ‘poor health affects longevity and therefore value for money of an annuity’, said Mayhew. Les Mayhew of the Cass Business School, who wrote the report, said any option came with risks but retirees needed to consider their health, their home and whether they wanted to pass money on after they die, in order to determine what to do with their pension.