Pension drawdown allows you to keep your fund invested in retirement as opposed to buying a miserly and restrictive annuity.
The issue is that while many individuals detest the possibility of an annuity, the alternative means keeping your money invested which brings its own worries and pitfalls.
Credencis give a step by step guide of what can be done to allay any fears.
Post Retirement Products
Income Drawdown allows you to take lump sum out of your pension fund while the rest remains invested. A lot depends on the fund managers you choose and how well they perform.
In a nutshell your fund needs to produce growth so you can take an income so you don’t run out of money before you die.
You can also choose to buy a fixed-term annuity – which allows you to defer a decision on how you fund retirement. The length of the annuity is normally between 1 to 5 years which means they don’t run for the rest of your life.
There are also pension drawdown plans which offer underlying guarantees. This might guarantee to pay you for example 5 per cent of your pension fund per annum. The income level varies with your age and gets higher as you gt older.
If your pension fund grows above 5 per cent per annum you can also receive the potential extra gain.
Of course any guarantee will come with an extra cost.
Recently the pensions market is now offering a hybrid annuity-drawdown option.
You can buy an annuity that provides enough guaranteed income to cover your basic expenses, then invest the other 50 per cent into drawdown scheme to try to grow your retirement savings further.
Unfortunately these schemes are also less flexible and carry more costs.
Don’t overpay the taxman
You can only take 25 per cent of your pension fund whilst the remainder is taxed at your marginal rate.
After you have taken the first 25 per cent, you should withdraw your pension savings in small amounts over a number of years to avoid hitting a higher tax threshold.
Occasionally an investor might be prepared to pay extra tax, for example to get hold of your entire pot and use it to purchase a buy-to-let property.
Income Tax is something to bear in mind when you are deciding how much income to withdraw each year, you don’t really want to take that much income in a single year that you get pushed into a higher bracket.
Interest Rates
For people with a pension fund invested in retirement, it’s important to keep an eye on what’s going on with interest rates because expectations about them can move stock markets, and because of their impact on government and corporate bonds.
Bonds are commonly held in investment portfolios as a ‘safer’ alternative to shares, and as a way to diversify risk.
However, once central banks start to normalise policy and raise interest rates again, many investors could decide they overbought bonds and dump them in a hurry. Warnings have been sounded for years and despite occasional corrections bonds have remained popular so far, but a crash could well occur eventually.
If interest rates were to rise this would lead to better annuity deals and make them a more attractive option again.
Final Salary Pensions
It is rarely a good idea to move from a safe environment like a final salary pension into a drawdown plan.
The FCA have made it compulsory that any final salary pension which is worth more than £30,000, Independent Financial Advice must be taken.
In certain cases some people are happy giving up a comfortable final salary pension and investing in an income drawdown plan. This may be if they are single, and do not have to provide a spouse/or dependents pension. The death benefits can also be much bigger moving into drawdown which might be important for inheritance purposes.
Income Levels
One rule of thumb, is to say you can withdraw 4 per cent of your fund a year without financial implications.
With recent volatility in stockmarkets and Brexit, what do you do if your fund plummets?
Lets say you have a pension fund of £100,000 fund and you lose 10 per cent in one year and you also withdraw out £4,000 as retirement income, that means your fund has dropped to £86,000.
You now have a smaller fund, which means the income you receive will probably have to be lower. If you keep on taking income in the early years it can take time to potentially rebuild your fund and the income you want to receive.
If your fund falls maybe consider using your other assets like cash, and not relying on the natural income
Also consider using an Independent Financial Adviser like Credencis, and giving your investments a revamp.
Diversification of your Investments
Usually as you reach retirement the consensus is to move out of risky investments and into safer assets.
This was normally done in preparation for buying an annuity. You wouldn’t want a big drop in its value before purchasing an annuity. However, if you are planning to stay invested in pension drawdown, although a drop in value at is a big deal, you still have time for markets to recover, and there is the potential for higher returns.
Recent pension changes and low annuity rates have stopped people buying annuities. If you want to stay invested, it is more sensible to stay in a diversified portfolio.
A diversified portfolio will spread your money across many asset classes such as cash, shares, commercial property, corporate bonds, government bonds, and other investments such as private equity and hedge funds.
The diversified portfolio will also be spread between different geographies and different industries.
Your decision would be based on your Attitude to Risk, your Age, and other factors like your income needs.
Annual Review
Credencis recommend you review your investments once a year. Too many reviews per se can receive in your chosen fund managers not implementing their philosophy. You also need to be with a company that allows you unlimited free switches between fund managers.
State Pension Forecast
Credencis recommend you obtain a State Pension Forecast as early as possible when considering your Retirement Planning.
Also consider voluntary contributions to the State Pension if you are not going to receive the full amount.
Inheritance
If you die before Age 75 the beneficiary will pay no death tax and receive the whole fund. If the owner dies after Age 75 the pension fund will be taxed at their normal marginal rate.
The capital is normally lost with an annuity, although there are some available which can be passed on, and final salary pensions which tend to work in a similar way.
Please contact Credencis if you are considering bespoke pension advice with your retirement options.
We are situated between Derby and Nottingham, and visit clients nationwide.
Contact Credencis
“Live for today, invest for tomorrow”
If you would like advice on your pension options, or how to increase your annual pension income contact us to discover what we can do for you.