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Investment Times

Retirement planning - my approach

| 19 September 2017 | A A A
Retirement planning - my approach

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

I find myself sharing some thoughts with you today as I consider my own retirement options – though I should add I have no immediate plans to retire! Given there are expected to be 14.3m of us in the ‘65 plus’ category by 2026, 2.5m more than now, we are in good, and growing, company.

One client said to me that on hearing the chancellor’s 2014 pension freedom announcement, she and her husband “danced around the rosebush”. Like so many, they felt the money in their pension was theirs and the previous rules about how you could access your pension were overly restrictive.

I understand those sentiments but it does mean there are now many more decisions to make. Do you choose drawdown or an annuity, or a combination of the two? If you choose drawdown, how do you invest your pot and how much risk do you take?

More choice means a better chance of success, but also means more can go wrong. Investors need to equip themselves with greater knowledge, and need sufficient funds accumulated to take full advantage of greater freedom.

How I’ll avoid sleepless nights

Years ago I managed drawdown accounts on behalf of some clients. I must admit I didn’t especially enjoy the responsibility. Someone is entrusting their life savings to you and if that doesn’t give you sleepless nights then you have no heart.

It seems highly probable at some stage that I will use drawdown. I will only draw the natural yield from my pension – meaning I will withdraw the income my investments generate but leave the capital untouched.

Accordingly, I’m gradually shifting money into dividend-paying sectors such as UK equity income. These funds have the potential for both capital and income to grow, hopefully providing shelter against inflation. A rising income in retirement is surely what we all desire.

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Taking the natural yield does not remove investment risk. Income and capital will rise and fall. I prefer taking the natural yield because the alternative, selling investments to fund withdrawals, is inherently riskier and would feel uncomfortable.

Do annuities still have a place?

I haven’t dismissed an annuity. I like the idea of certainty that I can cover essential living expenses. Peace of mind is often overlooked when making investment decisions. Investing is about improving the quality of your life, and a retirement with constant worry over stock market falls is not a recipe for a long or happy life, in my view.

You need to be honest with yourself. Given increasing longevity, most of us will face at least one stock market downturn. Ask yourself how you will react. It’s worth considering dovetailing a source of secure income with drawdown to give you the best of both worlds. Those (like me) who have no final salary pension could consider an annuity for this purpose.

In conclusion, the choices are vast. You can educate yourself and make more informed decisions, but remember even an informed choice can go wrong. Nothing is certain when investing and I think the latter stages of accumulation in a pension are the very hardest.

If you’re at all unsure, financial advice could prove valuable.

My strategy in my pre-retirement stage is to move more money into income-bearing investments. In addition I no longer automatically reinvest the income. I allow dividends to build up, which allows me to rebalance into other investments and also provides a cash buffer against market downturns.

What you do with your pension is an important decision. Therefore, we strongly recommend you understand your options and check your chosen option is suitable for your circumstances: take appropriate advice or guidance if you are at all unsure. Pension Wise, the government’s pension guidance service, provides a free impartial service to help you understand your options at retirement.

Summary of retirement options

Annuity Drawdown UFPLS
Definition Exchange the money in your pension for a guaranteed income for life (tax-free cash at the start). Keep your pension invested with the option of unlimited income (tax-free cash at the start). Keep your pension invested and take lump sums (part of each tax-free).
Why might I consider this option?
  • You want a secure income for life.
  • You want tax-free cash at the start.
  • You want to keep your pension invested.
  • You want tax-free cash at the start and the option of unlimited withdrawals.
  • You want to keep your pension invested.
  • You want to take lump sums, part of which are tax-free.
How much income will I receive? This will depend on the size of your pension, what options you choose and annuity rates. Shopping around and confirming health details could mean you get more income.

You can take out as much (or as little) as you like.

You could receive an increasing income if investments perform well and your withdrawals are sustainable. You could run out of money if you withdraw too much, investments perform poorly or you live longer than expected.

You can take out as much (or as little) as you like.

You could receive an increasing income if investments perform well and your withdrawals are sustainable. You could run out of money if you withdraw too much, investments perform poorly or you live longer than expected.

What happens to my pension when I die? It will stop unless you have chosen certain options at the start. Any money left can be passed on to your beneficiaries. Any money left can be passed on to your beneficiaries.
Can I mix and match? Yes – you don’t have to choose just one option. You could select a mixture to match your needs. Yes – you don’t have to choose just one option. You could select a mixture to match your needs. Yes – you don’t have to choose just one option. You could select a mixture to match your needs.

Tax rules can change and benefits depend on individual circumstances

The value of investments can go down in value as well as up, so you could get back less than you invest. It is therefore important that you understand the risks and commitments. This website is not personal advice based on your circumstances. So you can make informed decisions for yourself we aim to provide you with the best information, best service and best prices. If you are unsure about the suitability of an investment please contact us for advice.