Flex first, fix later: a retirement strategy to consider

Savers approaching retirement usually either buy an annuity that pays a guaranteed income for life (but with no prospect of further investment growth) or draw income directly from their pension funds, which can be left invested but offer no guarantees about long-term security. Yet maybe there is a middle way. The Institute for Fiscal Studies (IFS) thinks so. It has just published new research advocating a “flex first, fix later” approach to retirement income. The think tank suggests this should be the default option for savers with money-purchase pension savings – as opposed to guaranteed final-salary benefits. People could automatically be switched into products offering this approach unless they have given different instructions, the IFS suggests.

The idea is simple. In the first ten years of your retirement, you would take the income-drawdown approach. Your pension savings would remain invested to continue growing, and you’d take pension income directly from this pot. Then at a pre-defined point in time, you would take the next step, using the value of the pension fund you have to purchase a guaranteed annuity income for the rest of your life. The IFS points to several advantages of this approach. You wouldn’t have to give up on all future investment growth when you may still have decades of life ahead of you. And you wouldn’t have to worry about managing your pension fund to last for the whole of that period. You’d also be likely to get a higher annuity income by buying it later in life. And you’d be making key decisions at a time when people are less likely to be suffering from cognitive decline.