At retirement (60s-70s)
If you have several separate pensions, perhaps as a result of spending time with different employers, it can be worth consolidating them into a single fund. You may be charged fees for doing this, so check what these are in advance – and it is rarely a good idea to move money out of a pension that offers a guaranteed income or annuity rate. However, by bringing a number of personal pensions together, you can see more clearly how your money is performing and it will be easier to manage your investments. You can also benefit from moving your money out of schemes which impose relatively high annual charges.
Retirement income options
These days people have much more choice over what they can do with their pensions. Before the rule changes, unless you were part of a company’s final-salary scheme, you had little choice but to use most or all of your savings to buy an annuity, a product designed to provide a guaranteed monthly income for the rest of the customer’s life. Annuities are still an option but it is now much easier to leave money invested in shares and other assets while making regular withdrawals from your fund – a process known as drawdown. Alternatively, you can withdraw money from your pension. 25% of your fund can be taken out as a tax-free lump sum, however, any other withdrawals from your fund are subject to income tax at whichever rate you currently pay. It is worth remembering that taking money out of a pension means you could end up paying more tax than necessary if you are not careful.
If you are already paying higher-rate tax during the financial year in question – for example, if you have just stopped working – withdrawals could be taxed at 40% if not more. By waiting until the next tax year, you could reduce this rate to 20% or less, depending on your new level of annual income. Equally, if you continue working – perhaps part-time or periodically – consider checking that this income, when added to your pension withdrawals and any state pension entitlement, does not push you into a higher tax bracket. Your choice might come down to whether you want a guaranteed income for life, however small (which an annuity offers) versus the uncertainty, but with greater flexibility, of leaving your money invested.
Your income strategy
One common approach is for people to use most of their pension funds to go into drawdown, with some of the money taken as cash and some used to buy an annuity – either immediately at retirement or a few years down the line.
Buying an annuity means you get the peace of mind provided by a guaranteed minimum income level (which is likely to be topped up by your state pension entitlement). But annuity rates are historically low at the moment, and you might get more income if you wait a few years before you apply.
With drawdown, you face two major choices: how much risk your investments should be exposed to, and how much income you can safely take every month. Keeping your money invested during retirement gives it the chance to continue growing: as most people today are likely to be retired for longer, it is reasonable to maintain a relatively high level of risk. But this also comes with the chance that the value of your holdings could fall.
A key aspect to watch is if you take too much income early on in your retirement. This could mean that your fund is depleted too quickly, while you – and perhaps also your spouse – are still reliant on it. This could equally be the case if your holdings do not grow as much as expected. Getting drawdown right is not straightforward so it is well worth seeking independent, expert advice.
Supplementing your pension
What are your options if your pension does not offer sufficient income, or if you want to raise more money? Remaining in work is an obvious one and increasing numbers of older people are doing exactly this, whether out of necessity or enjoyment. But you could also consider your home as a source of extra cash. Downsizing to a smaller, cheaper property is one option however consider the costs associated with moving, such as legal fees and stamp duty.
Alternatively, you could unlock money from your home without moving by signing up for an equity release scheme, which lets you borrow money against the value of your property. This will impact the size of any inheritance you are able to leave and can make it difficult and expensive to downsize at a later stage of life.
As with annuities, you will get more money from an equity release scheme the older you are when you apply: this is because providers generally do not get any return on their investment until their customers die or move into long-term care. However, these are big financial decisions and should not be taken lightly, so you should ensure you seek professional qualified independent financial advice.
Important information: Columbia Threadneedle Investments does not give investment advice. If you are in any doubt about the suitability of any investment, you should speak to your financial adviser. Data as at 30 September 2019 unless otherwise specified. Past performance is not a guide to future performance. The value of investments and any income is not guaranteed and can go down as well as up and may be affected by exchange rate fluctuations. This means that an investor may not get back the amount invested. Your capital is at Risk. The analysis included in this document has been produced by Columbia Threadneedle Investments for its own investment management activities, may have been acted upon prior to publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice and should not be seen as investment advice. Information obtained from external sources is believed to be reliable, but its accuracy or completeness cannot be guaranteed. The mention of any specific shares or bonds should not be taken as a recommendation to deal. Issued by Threadneedle Asset Management Limited. Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority. Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies. columbiathreadneedle.com
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