From the Bellpenny Nest
For today’s retirees, it’s no longer sufficient just to rely on traditional pension products in the hope they will deliver a prosperous retirement. Low savings rates and poor annuity returns, alongside longer, more active lifestyles and less generous workplace pension schemes, mean the way we manage our finances for old age has changed forever.
Whereas previous generations could depend on their pension for most of their retirement needs, a diversified strategy is now essential. This means considering and creating other income streams that take full advantage of tax allowances, provide flexibility and offer protection against whatever life throws at us.
Changes to pension rules mean there are now many different ways of achieving this ambition, with retirees increasingly shunning annuities in favour of leaving their pensions invested and drawing an income via a drawdown plan. The golden rule is usually that pensions should cover fixed outgoings, with lifestyle and travel choices dealt with by income from other investments.
Approaches will vary depending on circumstances and attitude to risk, but here are some options to consider with your Bellpenny Planner.
The starting point for most retirees will be an Individual Savings Account (ISA), which is a tax-efficient way to take an initial income in retirement without having to touch your pension pot. There’s now up to £20,000 available to invest within an ISA tax wrapper for this 2017/18’s allowance, or £40,000 in the case of couples.
In order to maximise this tax benefit, savers can make their funds work harder by considering a Stocks and Shares ISA (Equity ISA). Your Bellpenny Planner is able to research the entire market place and recommend suitable investments depending on a client’s risk profile.
Changes to ISA rules in recent years mean savers can now split their funds between a Cash and Equity ISA and put back any money they withdraw without it impacting on their annual allowance.
These enable investors to take a tax efficient income on a regular basis and deliver a steady, dependable stream of income that’s in keeping with the cautious risk profile needed in retirement.
They can be a good place for a lump sum, such as inheritance, or as an additional home for money once the ISA allowance has been exceeded.
Discretionary Fund Management
This is an option for those retirees who would rather let the experts take the strain.
Providers of discretionary services, such as Bellpenny’s sister company Avellemy, take responsibility for an investment portfolio based on aims and objectives agreed in advance.
A portfolio might include cash and bonds, unit trusts and alternative investments such as commodities or structured products.
Portfolios are monitored on a daily basis and can be rebalanced as required in order to make sure they are in line with the client’s attitude to risk. That provides more flexibility than investing directly in a collective fund.
Annuity later in life
Annuities, which provide a guaranteed income for life, have declined in popularity due to the rise of drawdown products and as a result of a long period of record low rates.
However, these products become more attractive later in retirement as attention turns to reducing risk and increasing the amount of guaranteed income, particularly as a safeguard against rising health and care costs.
What’s more, the rates on offer for purchasing an annuity will improve the older you are. This is due to mortality cross-subsidy, where those who die effectively provide a bonus for those who live longer.
Many retirees are asset rich but cash poor following years of rising house prices. As a result, the option of tapping into this housing wealth as a source of income can be particularly attractive.
Using an equity release product can unlock many benefits in retirement but is also a good way of transferring wealth between generations and paying for the luxuries in life without moving home.
Equity release schemes once generated negative publicity but the industry now boasts new and more flexible products under the supervision of a trade body and closely regulated by the Financial Conduct Authority (FCA).
Whichever of these income strategies you adopt, it’s important that decisions are made with the help of your Planner. The retirement landscape has changed dramatically in recent years, making it more important than ever to be fully aware of tax and other implications of your income-generating strategies.
It’s important to get it right. The effects of inflation can often be overlooked while as a nation we are living longer, which means for some people they will spend almost as much time in retirement as they did in the workplace. As a result, retirees must ensure their assets are working as hard as possible in order to achieve the financially secure old age we all crave.
For more information, contact your Bellpenny Financial Planner on 0345 475 7500.