Now we have some real experience of the effect of Pension Freedoms, it is worth re-examining the role of the professional adviser while you are finalising your retirement income. The way you draw your income once you get to retirement can influence the tax you pay and the total fund you will have to spend between now and your demise.
In the old days when the annuity was the default retirement solution, all there was to decide was the balance between a bit of tax free cash and an annuity; if the annuity gave a good yield and you had little debt, you took little or no tax free cash; conversely, if the yield was poor and you had debts to clear, you would take as much tax free cash as possible and invested any surplus outside the pension regime.
Again, back in the old days, IFAs talked about phased retirement, where early income in retirement was a patchwork of tax-free cash and a series of small annuities, to minimise your tax bill and leave as much pension money uncrystallised for as long as possible. The underlying assumption being that the longer you could leave some pension monies uncrystallised, the more the fund and the more tax free cash to spend in your lifetime.
All things being equal, this assumption still holds good, so it is worth juggling with non-pension investments, tax-free pension cash and pension income to get the best out of your personal tax allowances, your tax-free cash and meet your income requirements.
Once you get to retirement, there is no necessity for you to take your 25% tax-free cash out of the pension fund and invest it elsewhere. If your investments and pensions are platform based, (like our wealth solution), there will be little or no expense or investment differences between pension and non-pension investments, so no incentive to take money out until you are due to spend it. The drawdown provider will keep a track of crystallised and uncrystallised funds, (the proportion of the pension funds where the tax free- cash has been taken and the balance that still remains), so uncrystallised funds will still grow a larger tax free cash balance.
Working out the best composition of income is a complex task and will depend on your priorities both now and in the future, so enter into a dialogue with your adviser. The key pieces of information required are:
- The nature and size of your various pension assets; final salary schemes, purchased annuities and the state pension will pay out while you are alive, a money purchase pot used for drawdown will deplete over time.
- Your income needs in some detail for the next 5 years and some guidance for the years to come.
- Your capital needs for the same period, (paying down debt, home improvements, new cars and expensive holidays).
- Your attitude to investment risk
- Your capacity for investment loss
- Whether you have non-pension investments you can access for emergencies or to provide additional income.
Couples especially must explore their income options, as often the poorer paid partners will struggle to use up their entire personal allowance in retirement. Some element of income equalisation can save considerable tax over a number of years.
If you would like to know more about how we can help you plan and realise your financial goals then contact us at firstname.lastname@example.org or call us on 01223 792 196.
The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.