Your Retirement Needs a Private Pension

Published October 11, 2017
Private pensions (like the Personal Pension) can meet your retirement needs if you want steady, guaranteed income that's isolated from the market and continues for as long as you're alive.
  • Your retirement needs a Personal Pension if you’re in good health and want protection from market risk and the risk of outliving your money.
  • You retirement probably doesn’t need a Personal Pension if you prefer to have all of your money in the market for the potential of high growth.
  • We lay out the characteristics that make someone a good or not good fit for the Personal Pension.

The Personal Pension is an compelling way to provide for your retirement needs in this post-pension era. It offers the retirement security that no 401(k), IRA, or savings account can: a steady paycheck in retirement guaranteed to last no matter how long you live or what happens in the market. But, depending on your circumstances, it may or may not be a good idea for you. In this article, we lay out three characteristics that would make you a good fit and three that would not. But first, the what and why of the Personal Pension.

What Is a Personal Pension?

The Personal Pension is an annuity account. Instead of buying stocks and bonds, the money you deposit into a Personal Pension buys income annuities from the insurers on our platform. Annuities are guaranteed retirement plans backed by insurance companies. They provide steady retirement income that’s guaranteed every month for as long as you live. The Personal Pension is very similar to an employer pension, except that the monthly checks you’ll get in retirement will come from insurance companies instead of your employer.

Personal Pensions and annuities are managed by insurance companies because they’re guaranteed. Whereas with a 401(k) or an IRA, you are managing all of the risks of your retirement yourself, with a Personal Pension, an insurance company is managing them for you and giving you a guarantee. The big risks they’re taking on for you are:

  • Market risk: This is the risk that the stock market crashes when you are about to retire (or already in retirement). Because of the crash, you’ll have to sacrifice your standard of living.
  • Longevity risk: This is the risk that you live longer than expected and run out of money as a result. It’s a new problem that was created by the (accidental) shift from pensions to 401(k)s.

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By offloading these risks to the insurers on our platform (like Guardian, Lincoln Financial, and other A-rated or higher companies), the Personal Pension is able to provide you with a guarantee of income for life, no matter what happens in the market and no matter how long you live.

Why Should Anyone Have a Personal Pension?

At Blueprint Income, we subscribe to the three-legged retirement stool philosophy. That is, you’ll be best off in retirement if you have all three of: Social Security, a pension, and personal savings. Let’s talk about each:

  • Social Security: As long as you’re earning money and paying taxes, you’ll be eligible for Social Security benefits in retirement. You’ll get a monthly paycheck in retirement that’s calculated based on how many credits you’ve earned. Learn more here.
  • Pensions: At one point, almost half of the private workforce received traditional defined benefit pensions that provided lifelong income. While employers aren’t offering them anymore, Blueprint Income – along with the insurers on our platform – is. Learn more here.
  • Personal Savings: This one is easy today. As long as you have a 401(k), IRA, or comparable savings account, you’ve checked this off. With personal savings, you have the opportunity to invest as you’d like and have full control of that money.

So, a 401(k) meets the needs of the personal savings leg. It’s a way to invest in the market on a pre-tax basis where you can make all the investment decisions. But, it’s only one leg of the stool because it doesn’t provide any guarantees like pensions and Social Security. The riskiness of market investments cannot be overlooked. They have high potential for growth, but that potential comes at a cost – risk. With market investments, you’re always at risk of losing what you’ve saved. So, like everything else in life, don’t put something at risk that you’re not okay losing. (Don’t leave your backpack unattended, door unlocked, kid alone, etc.)

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What this means for your retirement needs? Invest safely and conservatively the money that you do not want to lose, i.e. the money you know you’ll need without a doubt in retirement. Do this with low-risk bond funds or through annuities and the Personal Pension which are similar in risk to a highly-rated bond but also provide longevity protection. A Personal Pension can be the foundation of your retirement while your future or other market investments give you growth potential.

A Personal Pension Is Likely Right For Your Retirement Needs If…

  • You want a guarantee for at least a portion of your retirement needs savings: The Personal Pension provides the certainty of a predetermined monthly annuity income that isn’t impacted by what happens in the stock market. To get this type of guarantee for your retirement needs savings, you have to be willing to give up some “upside potential” in the market.
  • You are healthy and plan to live a long life: The longer you live, the more time you have to receive that monthly paycheck from the insurer, making the Personal Pension a better value for your retirement needs. Generally, a high level of education, higher income, being in good health today, getting regular exercise, and not smoking all correlate with longer life expectancies.
  • You are more than 5 years away from retirement: The best way to build a Personal Pension is to start small and make more contributions over time that increase your retirement paycheck. It’s best when you’re far enough away from retirement such that you have time for the monthly income you’ll receive to really add up for your retirement needs.

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A Personal Pension Is Likely Not Right For Your Retirement Needs If…

  • You are within 5 years of retirement: The closer you are to retirement, the more you’re probably going to consider buying a traditional income annuity all at once for your retirement needs. If you’re really close to retirement, that means an immediate income annuity (starts within 12 months) and if you’re a little farther from retirement, it means a deferred income annuity.
  • You have a fully-funded pension provided by your employer to satisfy your retirement needs: If that’s the case, you’ve probably already got plenty of guaranteed lifetime income (when you include Social Security in the mix) for your retirement needs, and you might be well-suited to take more risk with the rest of your money.
  • You are looking to beat the market rather than get steady future income for your retirement needs: Trying to beat the market carries a lot of potential rewards (and risk!). When your money’s in the market, you’re looking to earn higher returns, but in order to do that you’re putting the principal at risk. The Personal Pension is in many ways the opposite. You’re getting a certain amount of income each month of your retirement. It won’t change based on what happens in the market and you’ll continue to get it no matter how long you live.

How Can You Sign Up For a Personal Pension?

You can open a Personal Pension account with $5,000 or more. That $5,000 can come from an existing retirement account, such as an IRA or 401(k) rollover, or a non-retirement account, such as a checking, savings, or brokerage account. Once you’ve opened an account, you have the flexibility to continue to contribute as much or as little as you want. There are no future contribution requirements. Click below to see what an initial contribution into the Personal Pension can guarantee a portion of your retirement needs. After just a few years in retirement, you’ll have recouped your initial investment, and the rest will be profit.

From there, you can fill out the information to have one of our specialists follow up with you, or continue with the enrollment process on your own. To do that, start with the Personal Pension Builder, where you’ll be able to set a goal for how to grow your pension over time. Note that all future contributions are optional, but it’s always great to have a goal.

Interested in learning more about retirement and the Personal Pension? Sign up here to be on our newsletter.

 

Matt Carey

Matt Carey

Financial Planning Professional

Matt Carey is the co-founder and CEO of Blueprint Income. He believes in the power of technology to make retirement simpler. Matt is a regular contributor to Forbes.com and has been quoted in both the New York Times and Morningstar.