KEY GUIDE. Investing for income at retirement

Transcription

1 KEY GUIDE Investing for income at retirement

2 Introduction The decisions you make at retirement could have repercussions for the rest of your life. That might be considerably longer than you think, as the table below shows. How long will your retirement be? Men Women Age now Life expectancy Chance of reaching age 100 Life expectancy Chance of reaching age % % % % Source: DWP 2010-based cohort expectation of life, , Principal Projection, United Kingdom Some of those at retirement decisions, such as the purchase of a pension annuity, may be irreversible while others, like the investment of a retirement lump sum, may need to be regularly reviewed. Investment planning at retirement can be more complex than at other times, for a variety of reasons. l Your investment goals may be changing, with the emphasis moving from growth to income. It is often best to start investment planning about six months before your intended retirement date. l Your attitude to risk and ability to absorb losses will probably change once you have no earnings coming in with which to make good any investment losses. l Your marginal rate of tax could be falling, as your full time earnings stop. l You may not be certain of your future income if, for example, you are planning to undertake some part-time consultancy work. l You may want to pay more attention to estate planning than you have before. l Your spending patterns are likely to change. l You could have a large one-off investment to make, for example, a pension scheme lump sum. The importance of making the right investment choices at retirement means that you need to take professional advice. It is often best to start about six months before your intended retirement date, because gathering all the relevant information can be a slow process. Pensions The decisions you have to make about your pensions will often be the most important in planning your retirement income; they can also be the most complex. Unfortunately much of the legislation surrounding pensions has been subject to revision over recent years, so it is all too easy to find yourself reading outdated information. Broadly speaking, your pension choices are driven by the type of pension arrangement(s) you have. These can be split into three main types. 1. Personal pension (including stakeholder pension and former retirement annuity) Your retirement fund, most of which has to provide a retirement income, depends on the level of contributions and investment performance. 1

3 2. Defined contribution occupational scheme Operates in a similar way to a personal pension, but will have been set up and operated by your employer. 3. Defined benefit occupational schemes Your pension (and usually lump sum) is based on your pensionable salary and service with your employer. Personal pension (including stakeholder pension and former retirement annuity) You can use the fund built up in your pension plan, which effectively gives you a pot of money. You can use this to provide: l A tax-free lump sum, usually up to 25% of the total fund; and l A pension income, which can be provided by an annuity or some other route, such as income withdrawals. If, like most people, you opt for an annuity, you can choose the annuity provider. Do not assume your plan provider will give you the best rate the opposite could be true. Making the right annuity selection is vital because once it s in place, normally no changes can be made to it in all senses it is for life. Some of the factors you may wish to consider include: Annuity rates change frequently and there is no substitute for asking your adviser to research the market to match your precise requirements. l How much protection do you want your annuity to provide against inflation? Full index-linking is an expensive option initially your pension might be about 40% less but its buying power will not steadily erode, as a fixed pension s would. l What provision should you make for dependants? A pension based solely on your life could leave your partner in financial difficulty if you die first. l Do you want any other death benefits built in, such as a guaranteed payment period of up to ten years? l Are you entitled to an enhanced annuity? If you have a chronic medical condition, such as diabetes, have suffered cancer in the past, or you are a regular smoker, you could qualify for a higher rate. Annuity rates change frequently and there is no substitute for asking your adviser to research the market to match your precise requirements. The alternative income options to an annuity normally involve investment risk and are unsuitable unless you have other reliable sources of income. If you are in that position, then you should discuss the available options, and their advantages and disadvantages, with your adviser. For example, income drawdown can offer much better death benefits and greater income flexibility than an annuity, but is more costly to administer and generally lacks any guarantees. Defined contribution occupational scheme The options under a defined contribution pension scheme are very similar to those of a personal pension. The income will normally be provided by an annuity and you will have the all-important options of choosing the format of the annuity and the provider. In some cases the scheme may offer its own pension as an alternative. 2

4 It is rare for schemes, other than those designed specifically for directors and senior executives, to offer income drawdown or similar options. You will normally need to make a transfer to a new pension arrangement if you want such flexibility, something you should not do without advice. Defined benefit occupational scheme In most defined benefit schemes outside the public sector you will have one simple choice to make about your main benefits: do you want to exchange some of your taxable pension for tax-free cash? Put that way, the answer may seem obvious, but in practice cash may not be the best option. The terms on which a pension is commuted for cash are often far from generous and may more than counter the tax exemption. In public sector schemes, cash is often a fixed part of the overall benefits, although usually you will be able to commute a small part of your pension for extra cash. If you have made additional voluntary contributions to the scheme, then you will also have to decide how these are dealt with. The options will usually be similar to those for defined contribution occupational schemes. Investments Investment income can make the difference between merely getting by and a comfortable retirement. However, that does mean that you should always opt for the investments offering the greatest income when you retire. As a general rule, the higher the initial income you receive from an investment, the less scope there is for future income and capital growth. Higher income may also mean paying more tax. As a general rule, the higher the initial income you receive from an investment, the less scope there is for future income and capital growth. Higher income may also mean paying more tax. Gone are the days when you could rely on bank and building society deposits to pay a meaningful rate of interest, even if the buying power of your underlying capital was being eaten away by inflation. If you are looking for income now, there are three main areas to consider both in the UK and overseas. 1. Fixed interest securities, which cover a wide area of investments from government bonds (gilts) to corporate bonds. Income yields vary considerably between different securities with, unsurprisingly, the highest yields from the riskiest bonds. 2. Shares, which in the UK and many other countries now yield more than shortterm deposits. Over the long-term, dividend income from shares has been less volatile than share prices, as the graph shows. 3. Commercial property is an often-forgotten source of income. The payment of rent is a high priority for most commercial property tenants, for much the same reasons as apply to residential tenants. 3

5 170 UK share values v UK share dividend payments Dividend Capital Source: Barclays Capital Equity Gilt Study Figures rebased to 1998 = 100 These three investment sectors can be accessed through a wide range of investment funds, which in turn can be held directly or through investment wrappers, such as individual savings accounts (ISAs) and investment bonds. ISAs can be particularly useful in generating income because: l You have no UK tax to pay on interest from fixed interest securities. l The dividends you receive are free of higher and additional rate tax, although the 10% tax credit cannot be reclaimed. You should review your investments with your adviser regularly usually once a year to make sure your objectives are still being met. l You have nothing to report to HM Revenue & Customs (HMRC). The choice of investments, the appropriate wrappers and where ownership should rest are all areas to explore with your financial adviser in the run up to retirement. Thereafter you should review your investments with your adviser regularly usually once a year to make sure that your objectives are still being met and to make any necessary amendments. Investing in shares should be regarded as a long-term investment and should fit in with your overall attitude to risk and financial circumstances. Past performance is not a guide to future performance. The value of investments and income from them can go down as well as up, and you may not get back the original amount invested. Levels and bases of, and reliefs from, taxation are subject to change and depend on your individual circumstances. This publication is for general information only and is not intended to be advice to any specific person. You are recommended to seek competent professional advice before taking or refraining from taking any action on the basis of the contents of this publication. The Financial Conduct Authority (FCA) does not regulate tax advice, so it is outside the investment protection rules of the Financial Services and Markets Act and the Financial Services Compensation Scheme. This publication represents our understanding of law and HM Revenue & Customs practice as at 3 April

6 Newbury Griffins Court London Road Newbury Berkshire RG14 1JX T F E newbury@griffins.co.uk Reading 1 Commerce Park Brunel Road Theale Reading RG7 4AB T F E reading@griffins.co.uk London 1 Ropemaker Street London EC2Y 9HT T F E london@griffins.co.uk achieving your goals, together griffinsfinancial.co.uk Griffins Financial Solutions Limited is authorized and regulated by the Financial Conduct Authority. Please remember the value of your investments can fall in value as well as rise. Past performance is not a guide to future performance. This publication is for general information only and is not intended to be advice to any specific person. You are recommended to seek competent professional advice before taking or refraining from taking any action on the basis of the contents of this publication. The FCA does not regulate tax advice, so it is outside the investments protection rules of the Financial Services and Markets Act and the Financial Services Compensation Scheme.