Following the government’s introduction of new pension freedoms in 2016, investors can draw money from their pensions as they need it, and keep their funds invested, instead of buying an annuity that guarantees income for life.
This has meant, however, that individuals are faced with difficult choices. Helpful information can be found at the Pension Advisory Service.
Annuities are currently offering relatively low incomes and drawdown offers greater flexibility and potentially better returns from both capital and income. It remains, however, a riskier option. The alternative of a Self Invested Personal Pension is dependent on market fluctuations, and consequently, it is essential to leave enough in the pension fund to avoid the worry that there is not enough left to cover further income needs in difficult market conditions.
Advice from an Independent Financial Advisor will be essential for most investors, and most advisors will have access to software for IFAs, such as that provided by https://www.intelliflo.com/.
There are several approaches to bear in mind. Drawing capital at regular intervals to meet needs will mean selling investments to generate cash. Although selling investments as they fall may appear attractive, this can erode the value of the portfolio quickly.
To adapt to these circumstances, the investor may have to reduce income expectations, change investment strategy or buy an annuity.
It may be advisable in these circumstances to purchase bonds or dividend-yielding equities and build up cash within the portfolio for withdrawal needs. However, keeping cash may affect the ability to sustain income over the long term, as cash reserves generate little or no return and can have a detrimental impact on the portfolio.
One way to avoid this is by limiting withdrawals to the income generated by the investment pot, but then income will be variable, depending upon the portfolio’s performance. Alternatively, an investor may choose to delay taking any income until later in retirement, giving more flexibility on the investment front.
An investor not relying on long-term income from the pension may choose to make larger withdrawals, but there are important taxation considerations with this strategy, particularly for high tax bracket investors.
Finally, all individuals will have different requirements and so there is no simple strategy to drawdown and so advice is essential.