Retirement

When it’s time to stop work - the ‘big picture’ approach to funding retirement

Choosing a retirement income plan is one of the most important financial decisions most people will make.

13 Jan 2015

Choosing a retirement income plan is one of the most important financial decisions most people will make. 

In its March 2014 Budget, the UK Government announced that from April 2015, anyone aged 55 or above will be able to take their defined contribution pension pot however they want, subject to their marginal rate of income tax in that year.

 

It is a cliché to say that you shouldn’t ‘put all your eggs in one basket’, but when it comes to retirement planning it is a valid observation.

This change means that anyone with an accumulated pension pot now has much greater flexibility and control over making financial plans for their retirement.

Look at all the options

While this is in many ways a positive development, Chris Hannant, director general of the Association of Professional Financial Advisers (APFA), observes that many people are missing out on potentially significant amounts of income by not considering all the options available.

These options include:

  • Drawdown lump sum (where up to 25% of a pension pot can be taken as a tax-free lump sum)
  • Deferred pension (delaying claiming in exchange for a higher level of income)
  • Annuity (where pension savings are exchanged for an income paid until death)
  • NISA (the new ISA into which savers can put up to £15,000 per annum)
  • Buy-to-let property
  • Income funds, which could generate a consistent income with the potential for long-term capital growth.

Many people reach retirement with funds from a variety of sources - which can include equity in their home, investments and savings as well as funds from occupational pension schemes.

It is a cliché to say that you shouldn’t ‘put all your eggs in one basket’, but when it comes to retirement planning it is a valid observation – not least because the point in time at which the investment is made can significantly affect its future value.

This is especially true in the case of annuities, where low returns on the government bonds that providers typically invest in have reduced the level of income available in recent years.

“Many people will continue to buy annuities at some stage because of the income security that they offer, but we expect that a significant proportion will now choose to defer this decision until 10-15 years into retirement,” says Robin Stoakley, Head of UK Intermediary at Schroders. “In the earlier stages of retirement, we expect that many of those who are prepared to accept at least some level of risk will now opt for investment-linked  income funds which have the potential to deliver a higher level of income.”

Top tips for planning a retirement income:

Define your retirement income and capital goals

Work out the level of income required to support your lifestyle

Assess all the options for topping up your retirement income

Clarify your intentions around leaving a legacy

What to discuss with your financial adviser:

Options for inflation protection

How to minimise any tax liability on your retirement income

How your attitude to risk affects your ability to plan for your retirement

If you do not currently have a financial adviser, one option is to search for a local, independent adviser atwww.unbiased.com. You may also find it useful to visit www.vouchedfor.co.uk, where members of the public rate and review advisers they have used.

Every detail is important

To build an effective retirement finance plan you should take into account every factor relating to your financial status and current and future needs.

Your plan should reflect three key considerations: your minimum income requirement; your capacity for loss; and your attitude to risk.

While it is prudent to look to minimise risk wherever possible, by accepting some capital risk it may be possible to significantly increase your retirement income without jeopardising your future financial security. This is one of the many areas in which your financial adviser can point you in the right direction.

If you are prepared to accept some risk in order to target a higher level of retirement income, it is prudent to ensure that your funds are not tied up and that you retain a cash reserve to meet potential emergency needs.

If you are not prepared to accept any risk, Melissa Echalier, senior policy researcher at the Pensions Policy Institute, refers to the potential value of index-linked annuities, which provide protection against the rising cost of living by linking the value of the annuity income to inflation.

With choice comes responsibility

Some commentators have raised concerns that allowing easy access to pension funds will encourage retirees to blow their savings. However, the experience of other markets where savers have been able to access their pension pot more easily (notably the US and Australia) is that relatively few have drawn down most or all of their investments and spent the cash immediately, leaving them dependent on state support to fund their retirement.

While many people are expected to maintain a variety of sources of retirement income,  investment-related income funds are likely to become an increasingly important part of the product mix as retirees seek to take advantage of the changes announced in the 2014 Budget. For more information on retirement solutions from Schroders, visit www.schroders.co.uk/retirement.

Many people will continue to buy annuities at some stage because of the income security that they offer, but we expect that a significant proportion will now choose to defer this decision until 10-15 years into retirement. In the earlier stages of retirement, we expect that many of those who are prepared to accept at least some level of risk will now opt for investment-linked  income funds which have the potential to deliver a higher level of income.