IN the fourth of my columns on retirement, let’s look a little closer at one of the options I talked about last week, pension drawdown.
At retirement date you are no longer forced to buy an annuity straight away, and so you can leave your pension fund invested and allow it to grow, whilst also benefitting from its inheritance tax benefits. Let me explain, as this is one of the most beneficial reasons for having a pension.
On death of the pension member, the benefits are passed to the beneficiaries free of inheritance tax. They do not form part of their estate. It makes sense, therefore, to maintain the value of the pension fund and spend where you can outside of that, in other words, other investments.
That benefit can then pass on to other generations over the years to draw from that pot what and when they need. Excellent.
Peter McGahan on retirement:
- What options are available to those with a personal pension?
- How much income do I need in retirement?
- Tips for when you're coming up to retirement
If you have consulted with your independent financial adviser (IFA) who is covering the whole of market, and they recommend drawdown, you then need to consider the options available.
A 65-year-old going into retirement drawdown has to consider how long they will need this benefit and access to income. Life expectancy in the UK used to be very competitive in the 50s, ranking seventh in the world, but it’s now 29th.
The UK delayed increasing the pension age any further because life expectancy is dropping. If you made it to age 50 as a male in 2006, your life expectancy was 86.3. Today, if you make it to 50, its age 83.9. For a female, it dropped from 89.3 to 86.7. That’s a lot of heartbeats, eyelash flutters, birthdays and smiles of your children/grandchildren to be missed. The worst trends in life expectancy are in the poorest communities.
Consider also that this pension fund could run through many generations, so it’s not just your life expectancy, it’s the term of the whole pension through generations.
Key things to consider therefore are that the fund should increase in value as much as possible above inflation. Key matters to consider therefore are the threats and opportunities to the upside growth of the funds. They can be grouped as: charges, fund performance and options, and flexibility.
Charges: Your independent financial adviser will look at all the options available based on your need, but the charges can be high with some organisations, as well as complex. The aim of a highly charged product is to hide its transparency in charges by de-commoditising it eg: A blue cup costs x in Sainsburys, and y in Tescos. Buy the cheap one. That’s a commodity.
Companies therefore mystify with little ‘perks’ here and there which muddies the waters, which makes it harder to compare, and they can make a few extra pounds.
Some have flat fees, some are tiered which suit higher levels of investment, and there are platform fees, admin fees and dealing fees. You’ll also have to pay for the fund manager to manage the money. Don’t look at charges alone.
In a rising market, the lower charged fund looks great because everything is rising, so the less weight on the balloon the better. In a sideways or difficult market, the management of the fund manager can come into its own.
Which showed the difference in cost between the best and worst options for a £260,000 pot was nearly £18,000 over 20 years. They also say a cynic knows the cost of everything and the value of nothing, so take good advice on this.
Investment: Some drawdown options have low, or restricted options for you to invest. I’ve covered this before with an example of just £100,000 invested over 20 years in the worst and best fund. One produced a fund of less than £96,000, the other, over a million. See note re: life expectancy above.
An independent financial adviser will also talk to you about flexibility. Most drawdowns give you access to the flexibility you need to do what you want, but, have the conversation. Can you vary payment amounts and when you take them? You may keep a part-time job in the early years, use savings after, then decide on a lump sum. Flexibility is important.
Finally, scammers. These guys are annoying. You will never, ever get cold called, or approached to do a pension transfer. It isn’t allowed. If they tell you there are loopholes, its twaddle. There are none. Trust me. Use a reputable independent financial adviser.
:: Peter McGahan is chief executive of independent financial adviser Worldwide Financial Planning, which is authorised and regulated by the Financial Conduct Authority. If you have a question on pension drawdown or would like a review, call 028 6863 2692, email firstname.lastname@example.org or visit www.wwfp.net