High earners can feel hemmed in by continued tax raids pension savings, but by thinking outside the box they can find ample tax-efficient routes maximise their retirement savings.
The overhaul of the pension regime has been a game-changer for the UK financial services industry. The FWM team gives you a guide to retirement planning
People will no longer be obliged to purchase an annuity with the bulk of their money and will be freer than ever to use their pension pots as they see fit.
Yet with these greater freedoms come greater responsibilities. The government has already said it will not step into the breach to provide additional support such as housing benefits if retirees decide go on a spending spree with the funds that should have sustained their lifestyle through their non-working years. But even those who choose to carefully husband their pension pots have lots of factors they need to build into their retirement strategies.
From the start of the 2015/16 tax year, over-55s with a private pension will be able to access them almost like an instant-access bank account – allowing them to cash in all the money in one lump sum, go into income drawdown or purchase an annuity as they choose.
The huge benefit to savers is that they can arrange their affairs in the best way for them as an individual – making their money work as hard as it possibly can. Your stage of life and health, your financial obligations, the plans you and your family have and your overall tax position are all vitally important factors.
Retirees will be able to withdraw up to a quarter of the their total pension pot tax free, but withdrawals above this level will be subject to income tax charged at the individual’s marginal rate in the year the withdrawal was made. This means that tax considerations will be very high on the agenda for retirees.
Diligent savers will have significant sums at their disposal when they turn 55. However, relatively few people will be stopping work completely at that point and indeed many people today carry on in some kind of employment well past the state retirement age. This means that each individual will have some very finely balanced decisions to make about the size of any lump sums they wish to take and the timing and manner of entering income drawdown. Any pension proceeds must be viewed light of your overall financial affairs and any other income you might have.
Tax liabilities may not be a risk per se, but they should definitely form part of your investment planning – as they certainly will with any good wealth manager (although they may not offer tax planning advice themselves). There are a range of questions to think about on the tax front, such as when it is best to realise capital gains from your portfolio; whether some tax-efficient investments like Enterprise Investment Scheme or Venture Capital Trust vehicles might be deployed; and if the eventual Inheritance Tax liabilities on your estate can be reduced.
Another of the big but perhaps less well-known changes to come in under the pension reforms was a significant reduction in the death tax charges on pension assets which means that they are now a much more important part of the estate planning armoury. If you require financial planning assistance as well as investment management advice, simply specify so when you begin our matching process.
The value of professional investment advice is hard to overstate, for both those approaching retirement and people still building their pension pots (who will be grappling with the fact that the lifetime contribution allowance has now been lowered to £1m). But while both categories of people need to consult professionals to make sure their wealth is working as hard as possible, retirees have a special set of concerns.
The majority of people will want to enter some kind of income drawdown with their pension, taking an income while keeping the remainder of the funds invested to generate returns which will provide for further income needs. The first challenge here of course is that it is difficult to know what those needs will be and how long they will last.
Investors therefore have to plan for a variety of (pleasant and unpleasant) scenarios which will have to encompass eventualities like care home fees too. A professional wealth manager will be able to devise an investment strategy which will enable you sustain your lifestyle for a realistic period, with provision also built in for emergencies, regular discretionary spends, gifts to family and even big-ticket items like a luxury car or holiday home too, if you so wish. Wealth management is just as much about fulfilling long-held ambitions as it is the more serious things in life.
But while you must certainly take a long view on putting your pension funds to work, you should also be wary of entering any investment which is highly illiquid, or at least not invest any money you may need at shorter notice. You may want to think about your pension in terms of different “pots”, with each having a different profile in terms of risk, return and volatility, and so a different mix of asset classes and financial instruments, depending on their final purpose. A pot intended for a classic car purchase in the mid-term will look very different to monies intended for the education of grandchildren 20 years hence, for example.
There are many risks your wealth needs to be defended from over the decades you may spend in retirement, but inflation is one of the biggest. You need to prevent your income from being eroded in real terms and so will likely need some strong capital growth from your investment portfolios in order for your wealth to keep pace with inflation.
There are a range of strategies wealth managers can devise, whatever mixture of income and gains you seek. Also remember that your investment strategy will not remain static over time; while you are younger you have longer to recover from any losses on your investments. Wealth managers can also create very significant tax efficiencies too through their choice of investment vehicle.
The FCA recently launched the second wave of its ScamSmart campaign to try to head off a predicted wave of unscrupulous parties offering to invest people’s pension pots. In most cases, the very high levels of return being offered should put retirees on their guard, but we can expect fraudsters to become increasingly sophisticated in their nefarious activities.
Savers need to be very careful about who they deal with when it comes to investing their pension savings. Take proper advice before making any serious decisions and only work with investment firms regulated by the FCA, as all the institutions on the findaWEALTHMANAGER.com panel are. (The regulator also publishes a warning list of companies attempting scams). Also remember that professional wealth managers will only promise sensible returns which are achievable in line with your circumstances and risk appetite. If the returns on offer seem too good to be true, they probably are.
The poor value that some annuity providers had been offering meant that savers rejoiced when the obligation for them to purchase an annuity was removed. However, this does not mean that annuities should be dismissed out of hand going forward.
Purchasing an annuity will appeal to those who prefer the security of having a guaranteed income from their pension pots, particularly given the very real threat of longevity risk. This is the risk that you will outlive your savings – something which is unfortunately quite common in countries where the pension regime has been liberalised as the UK’s now is.
Providers are working hard to come up with attractive options to lure retirees back to the annuities market, so you may be able to secure a far better deal than prior to the pension reforms. Make sure that you take proper advice before making any irrevocable decisions, however, to make sure you get the best annuity for your needs.
Final salary – or defined benefits – pension schemes have been the subject of much press speculation, with commentators fearing that companies will try to persuade members to cash out in order to reduce their liabilities. The advice here is not to make any hasty decisions and to take in-depth advice before exiting a defined benefits scheme. Otherwise, individuals could be throwing away a very good deal indeed relative to the transfer value offered.
These are just a few of “Retirement 101s” that savers should be thinking about when it comes to accessing – and enjoying – their pension pots. Given how important pension pots are to sustaining a pleasant lifestyle it is vital to put deep thought into any significant decisions and it is always wise to consult a professional when so many factors need to be taken into account.
You can start the process of finding the best professionals to manage your wealth by trying our smart online tool. Or, if you would like to discuss your situation further with our straight-talking team, please do get in touch here.