Prime Time Financial

There is a growing range of pension options which provide some middle ground between the security but inflexibility of Lifetime Annuities, and the flexibility but investment risk of Drawdown... "Not too hot and not too cold".

These options are represented by different types of product but have collectively been called "Third Way" products. Here's a brief overview of the major features available, although bear in mind that even non-pension products such as onshore and offshore bonds - particularly those with some sort of income guarantee - may have a place in retirement planning.

Fixed Term

Some products are for a fixed term which you can select, such as three to ten years, or up to age 75. The advantage of this is that you can then make a further decision at the end of that term about the best thing to do - perhaps take a further fixed term, or buy a lifetime annuity at a better rate than you would have had previously (due to poorer health, maybe).

Choice of Income

During the term you may be able to select the level of income (within certain limits). A lower income may mean a higher lump sum available at the end of the term to buy the next option. In some cases, the income has the potential to increase dependant on investment performance, and there is generally a minimum income guarantee.

The income may be fixed for the selected term, or you may be able to change it.

Where an income is not needed immediately (perhaps you are still working part time), some products provide the option for the income to start at some point in the future.

Staying Invested

Particularly during the early stages of retirement, leaving some capital invested with the potential for growth may make sense, albeit with investment risk. Investment performance may have an impact on the income available or on the capital sum available at the end of the term, or both. A "ratchet" effect may be included which means that investment gains will be locked in, regardless of subsequent performance.

Guarantees

In most cases some sort of guarantee is available, either an income guarantee - such as a minimum income regardless of investment performance - or a capital guarantee where you know what lump sum you will walk away with at the end of the term.

Costs

Third Way products have a cost associated with them which is likely to be higher than other options, and that needs to be fully understood before embarking on that route. However, for many people, it will be worth paying for that extra level of flexibility in retirement.

Last reviewed 30th June 2011