Pension freedom and the massive reduction in the take up of annuities should herald a significant change in the attitudes and expectations of the “mass-affluent” retiree.
Up until very recently, pension income was a rather passive process; if you were lucky enough to have a final salary pension, then you just took the promised income and if you had a money purchase scheme, you bought an annuity. Once you had done that, you spent the money as it arrived, saving any you did not spend for a rainy day, or worrying about where every penny went, if you were short.
For the final salary folks, it is probably business as usual, with investment and income being a “somebody else’s problem”, but that luxury has gone for the money purchase/defined contribution retiree wanting to use flexible drawdown. Now there are many more variables and being passive about it is likely to get you into financial hot water.
Instead of passively taking an income from an annuity, drawdown requires you to remain invested in the market in one form or another and to take income from the investment pot. You need to be actively engaged or paying someone else to worry about the following:
· The asset mix you are invested in
· The holding cost of the assets selected
· The natural income generated by the assets
· The total return from the assets
· The volatility of the assets
· The underlying risk of the assets
These are not pensioner’s usual concerns; these are the considerations of a long-term investor.
Once you make that leap, it then follows that you need an investment adviser, who can build you a retail investment portfolio to keep your money working at inflation and above. American studies have suggested that 4% is a long-term sustainable yield, so a £100,000 investment pot should be able to generate £4,000 every year, come hell or high water. This assumes a well-designed portfolio, with a mix of assets selected from cash, corporate bonds, gilts and equities.
As a long-term investor, your relationship with your money is far from passive; what you demand as spending money today will have an effect far into the future; your tolerance to investment risk will influence the asset mix and your relationship with your advisers will have a direct impact on expectation and performance.
For some, all this investment hassle will not be worth the candle, so they need to go back to annuities or just taking the cash out as an Uncrystallised Fund Pension Lump Sum, (UFPLS), leading potentially to passivity and tax bills. As I have said before; (http://www.martin-redmanpartners.co.uk/blog/day/month/year/is-there-a-market-for-selling-annuities-back-to-the-provider), just how complicated do you want retirement to be?
If you don’t want your retirement to be complicated, but want to be an investor not a pensioner then talk to an investment adviser and become involved in managing your money for your future.
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.