Kate Marshall 12 April 2019
Thanks to pension freedoms, you have the opportunity to take charge of your income in retirement. You can keep your pension invested, withdraw an income through drawdown or as lump sums, and pass on what’s left to your loved ones (tax free in some cases).
Unsurprisingly, the UK Self-Invested Personal Pension (SIPP) market has grown by over 55% in the last couple of years, as people take advantage of these freedoms and rules around inheritance tax.
But if you keep your pension invested, how can you make sure your plans stay on track and you meet your investment goals? Our 3 step plan could help.
Remember all investments, and the income they give, can fall and rise in value. So there’s the potential for growth, but you could also get back less than you invest. What you choose to do with your pension is an important decision and you can’t normally take money out until you’re at least 55 (rising to 57 in 2028).
Set your investment goals
Once you know what your end goals are, you can work backwards and plan how you’ll achieve them.
Common goals include having the income you need to live the lifestyle you want in retirement, and growing your wealth so that you know your loved ones, particularly any dependants, will be financially secure after you’re gone.
Factors like your pension size, income needs, number of dependants and even life expectancy can all play a role in setting out how you achieve your future goals. They also mean you’ll have your own attitude towards investment risks and the ability to accept them.
If you don’t have enough secure income to cover your essential spending you should seriously consider swapping at least some of your pension for a guaranteed lifetime income (an annuity).
Decide your income strategy
You don’t have to take any money from your pension if you don’t need or want to, but usually up to 25% can be taken tax free and the rest will be taxable. How you receive your payments will depend on what withdrawal option you choose.
There are three main strategies for taking income, each with their own benefits and risks. The strategy you choose is likely to link to your goals for the future.
No income (or just your tax-free cash)
Pensions are extremely tax efficient and usually free from inheritance tax when passed on. So you might decide to use up other sources of income first (like your ISA savings) before dipping into your pension, leaving more for your loved ones to inherit.
Like over a third of our drawdown clients, you might just take your tax-free cash for now and put off making other withdrawals until a later date. This could be a tax efficient way of topping up your income if you’re winding down your hours at work.
Take only the income your investments produce
If you need an income from your pension which needs to last your whole retirement, this is arguably the most sustainable strategy. Also known as taking the natural yield, the income earned from your investments will dictate how much income you take. This could include the dividends and interest from shares and bonds, or the funds that invest in them.
Your income will depend on investment performance so it could rise and fall, but the chances of a growing pension pot that will continue to provide an income, is increased.
Take a planned income
If you need an income but you’re less flexible with the amount you get, you might decide to take a set income from your pension each year. You might get more income initially, but there’s a much higher chance of running out of money with this strategy, especially if you need to sell your investments to pay for withdrawals.
Selling your investments after they’ve fallen in value will damage your portfolio’s ability to recover, and taking too much income too soon could quickly run down your pension value, leaving you short of income in the future.
Pick investments to match your strategy and goals
You could increase your chances of achieving your goals by choosing investments with objectives that compliment your withdrawal strategy and attitude to risk.
If you don’t need an income yet, a common approach is to choose investments that aim for long-term growth. Often this includes funds that invest in a wide range of companies, either in the UK or across the globe. It might also include higher-risk smaller companies with more potential to grow.
If you’re happy to just take the natural income yield, a sensible tactic could be to seek out investments which focus on generating income. That way you could increase the amount of income available to take. Though yields aren’t guaranteed and income will vary.
If you’re planning on taking a set income, and selling your investments to fund it, you’ll need to be particularly wary of market falls. You might prefer to choose investments which specifically aim to defend against them.
Get help if you’re not sure
This article isn’t personal advice. We strongly recommend you understand all your options when it comes to deciding what to do with your pension. If you’re not sure what’s right for your circumstances you should seek guidance or take advice.
The government provides a free and impartial Pension Wise service to help you understand your options.
Our award winning advisory service offers one-off and ongoing financial advice which could help you to make confident decisions and reach your goals.