How To Access Your Investments and Pensions in Retirement?
There is a big difference between planning for retirement and actually retiring. I think most people understand that they should set some money aside for their later years, but it is common for them to feel this is so far off that they can’t really focus on what retirement might look or feel like. Even looking ahead 6 to 12 months can seem impossible.
At the time of writing, I’m also wondering what the next 6 to 12 months will bring. Will the coronavirus lockdown seem like a distant memory, will we all be vaccinated, will we be shaking hands, or will I still be using Zoom for client meetings? No matter the answer to any of these questions, and accepting that we cannot predict the future, I can confidently state that the future is coming and what will be, will be.
Because we can’t tell the future good financial planning principles should be called upon rather than relying upon absolutes. There is rarely one best way to do anything and having flexible options will normally give you the outcome that works best for you.
It is impossible to cover every option for all clients here, but the rest of this document will focus on some of the options you may have. Before we start, let’s assume if you read beyond this point, you are approaching retirement or have recently retired and have an investment portfolio made up of personal pensions, ISAs and general investments.
Although I have been talking about “retirement”, really what I mean is “financial independence” i.e. you are now at a time in your life when you need to call upon your savings to meet your expenditure requirements. It is also possible you have semi-retired and you need to top up your income from your savings.
Do you need extra income?
Most of us have become used to a monthly salary and are fearful of this disappearing. Often when I speak to retiring clients they say, “I need a monthly income equal to my pre-retirement salary”. We all have essential expenditure and discretionary expenditure. Council Tax, groceries and utility bills may be essential; gifts to family, holiday spending and new cars may be discretionary, but I recognise that some people have different views to others.
I usually recommend that essential spending is met from regular withdrawals, or income, from your portfolio, and discretionary spending is met by accessing your cash reserves. Cash reserves should also be replenished, if required, from your portfolio from time to time.
How to generate a regular income
If you are not fortunate enough to receive a final salary pension, it is still possible to generate a guaranteed income from your portfolio, but you may have to compromise.
You could consider buying an annuity with all or some of your personal pension. Annuity rates on the open market are at historically low levels and may not represent good value, but some existing pensions have guaranteed rates built into them and these can be very attractive.
If your existing pension does not offer a guaranteed annuity rate you can still arranged a fixed withdrawal to meet your requirements. Fixed withdrawals may feel like a guaranteed income as you receive the same payment into your bank account month in, month out but you need to remember that the value of your portfolio is still fluctuating and being depleted by your withdrawals. This is especially true if your withdrawal rate is higher than your growth.
The most common way to access your pension is by using Flexi-Access Drawdown (FAD) although other options also exist. With 25% of your pension fund being tax free you can control, to some extent, the amount of tax you pay each year.
Should I access my ISA before my Pension?
A lot of consideration should be given to what tax wrapper you should access and in what order. If you have a General Investment Account (GIA), an ISA and a Pension then there are different tax consequences to accessing each part.
Leaving your pension to last is often seen as the sensible option because it grows tax free in the meantime and if you do not need the funds, the tax position on death is extremely favourable for your beneficiaries.
To counter this, there are few other factors to consider. First, accessing pensions beyond the tax-free element, leads to an income tax charge at your marginal rate which can be as high as 46%. This means if you need to access a large amount of capital at short notice, for an unplanned expense, you may have to pay significant income tax.
Accessing a combination of pension and non-pension funds is likely to be appropriate unless your non-pension assets are sufficient to suggest you will never need your pension. In that case you could leave your pension alone and when it is eventually passed to your stated beneficiaries there will be no inheritance tax.
Another important consideration is your available personal allowance. If you have some unused personal allowance, then accessing your pension can be appropriate. This means up to £12,500 pa of your taxable pension fund can be paid to you tax free.
Before accessing your pension or ISA you should consider whether your general investments can be accessed without paying capital gains tax. If so, this should be your first port of call. You may also have other options, such as Investment Bonds, and these all need to be taken into account.
As a financial planner, my goal is to help clients receive the income they need, keep their tax to a minimum and to ensure their funds last all their life. This is often possible with the help of financial modelling software, and the client giving full consideration to their future expected expenditure.
Everyone is different and we all have our unique requirements and views. There is, therefore, no one way to approach funding your retirement. Use sound financial planning principles by focusing on your long term while taking account of potential uncertainties.
If you need advice about the best options for you then engaging with a Chartered or Certified Financial Planner is a good place to start. I wish you all the best for your retirement.