Ian Thomas, Pilot Fiancial Planning
'Maximise Your Income in Retirement'
The introduction of a flat rate State Pension from 2016 is, in my view, to be welcomed. Whilst there will undoubtedly be both winners and losers from this change, it will create a much clearer decision-making framework for younger people when it comes to private saving.
The removal of means-tested pension benefits will mean that people who aspire to an income of more than £140 per week during retirement (and/or wish to stop working before the ever-increasing state pension age) will quite simply have no option but to develop other sources of private investment income over time.
For many of you who are a little closer to retirement age and approaching this point without a defined benefit company pension, or other source of secure income, the outlook is somewhat more uncertain. Many are finding that their plans need to be adapted to cope with the ‘perfect storm’ of poor investment returns and record-low interest and annuity rates.
Often, some difficult decisions need to be made; perhaps making some compromises in terms of expenditure, or even continuing to work part-time, to supplement income. In this situation, it’s also very important to ensure that any pensions, ISAs, cash deposits, buy-to-let property and other assets are structured to maximise returns and tax efficiency.
What most people need is a way to bring together all of the various pieces of the jigsaw into a clear and complete picture, so that the various options and trade-offs can be discussed and informed decisions made; something in which Pilot Financial Planning specialises.
Pension income options
Although there is a need to consider the bigger picture when looking at retirement income, there are some specific decisions which need to be made in relation to any investments held within pensions.
Since 2006, it has been compulsory for insurance companies to offer an ‘open market option’, rather than forcing clients to purchase their – often uncompetitive – in-house annuity products. Despite this, the majority of annuitants still simply sign the forms their insurance company sends them!
Although all annuity rates are based on long-term gilt yields, which are currently very low by historic standards, rates vary widely between providers and are also influenced by other factors such as health, dependants’ benefits, guaranteed payment periods and whether income payments increase with inflation, or remain level.
For those with larger pension funds, a further option is to leave your pension fund invested and to ‘drawdown’ income from it instead. This enables you avoid locking into current annuity rates for life and, if investment returns are good, ultimately improve your retirement income. An additional benefit of income drawdown is increased flexibility, which was further improved last year for people with a minimum level of ‘secure’ retirement income (currently £20,000).
Of course, gilt yields could fall yet further and investment return cannot be guaranteed, so for many an annuity will remain the preferred choice.
Phased retirement is yet another option, again for investors with a larger pension fund, and those who do not require the standard 25% tax free cash lump sum for a specific purpose. This alternative gradually crystallises your pension assets over time, thereby utilising successive lump sum payments to create a more tax efficient ‘income’.
Pension income planning is one of the most complex fields in financial planning and I have barely scratched the surface of the subject here. There is no single ‘right’ answer as to which of the above options is preferable, however there will always be an optimal solution for every individual. This is one area where it is always advisable to seek professional advice before making any significant decisions.
Contact Ian Thomas at Pilot Financial Planning:
08453 712 808, ian@pilotfinancialplanning.co.uk
www.pilotfinancialplanning.co.uk
Pilot Financial Planning is authorised and regulated by the FCA. This article is intended to provide helpful information of a general nature and does not constitute financial advice.
First Published May/June By The Dart 2012