Mike LeGassick, Independent Financial Adviser with Manning and Company,
explains why the blended approach to retirement income planning could be the
best choice.
If you were born around 1960, you
will soon be facing a pivotal decision: how will you shape your life over the
next 30 years?
First of all think back 30 years,
to 1985 – when music came on vinyl or cassette, and the internet hadn’t yet
arrived. Can you think ahead to the year
2045 and imagine what life might be like?
Honestly, can any of us?!
Yet thanks to the new pension
freedoms which come into effect in April, that’s exactly what anyone aged 55 or
over will have to do. As never before,
your future is in your hands.
It’s real money
If anyone talks about ‘pensions’
the subject is often greeted with glazed eyes and a polite nod. It’s not exactly considered the riveting
stuff of life - not helped by the fact it comes with a jargon all of its own!
You may have paid into a pension
scheme for years – but the money has probably come off your salary before it’s
even reached your bank account, so it may never have felt ‘real’, and you may
not have thought too much about what you’ll do with it.
But your pension pot is real
money. And from April, once you turn 55
you can get your hands on it – all of it.
Yes, you’ll be taxed at your marginal rate on 75% of it, but you can
have your cash in your hands if you want.
This is what is suddenly making
pensions exciting, and life-changing.
Because the decision you make now – whether to take the cash, invest it,
buy an annuity, or a mix of all three – will determine what the rest of your
life could look like.
Without a doubt, this is something
that’s worth taking time to think seriously about.
Pension Wise
The government has launched a new
website, www.pensionwise.gov.uk, to provide guidance on pension choices.
The key word here is ‘guidance’ –
the website does not provide ‘advice’ for your circumstances; and crucially it
states clearly that it cannot advise on specific financial products.
The website is a useful tool to
give you an overview of the new regulations and start your thinking process
about the issues. It can give you
general ideas, but leaves it firmly up to you to do the research.
There’s also one other thing you’ll
notice on Pension Wise – a phrase which appears several times:
“You might want to talk to a
financial adviser.”
The website itself recognises its
role and limitations; and that a decision this important requires more than a
‘bit of googling’ – it needs expert, personally-tailored advice.
Don’t limit yourself to one choice!
An important aspect of pension
freedom is that you can choose to spend your pension pot in more than one way;
and you can blend different income streams together to suit your needs.
For example, if you need a minimum
reliable income per year, you could choose to spend part of your pension pot on
an annuity – a guaranteed income for life.
If you want to start your
retirement with a holiday or family celebration, you could choose to take some
of your pot as cash.
If you want to give yourself
flexibility for the future, you can either leave some of your pension pot where
it is, or invest it and draw an income from the earnings.
For many people this blended
approach will be the most flexible yet practical solution. Like ice-cream in a bowl, you can ‘blend the
flavours’ of these very different income streams to suit your personal
tastes. Working with a financial adviser
will help you get the blend right.
Flexibility for the future
My final and most important thought
is this: don’t do anything now that could limit your options in future. As we’ve agreed, looking ahead 30 years is
hard – so build in enough flexibility in your plan, and retain enough resources
so you can change tack later if and when your circumstances change. After all, your pension pot has to last you
for the rest of your life.
What’s more, it could even last
longer! For most pensions (all except
final salary ones) you can even bequeath what remains of your pension pot to
your beneficiaries – tax-free if you die before 75, taxed at marginal rate
thereafter. And it can be passed on
again and again until it’s all gone. So thinking
about your loved ones is another reason to ensure your decision is well-informed.
As the Pension Wise website says,
“You might want to talk to a financial adviser” – and if you do, please give me
a call on 01752 837950. I’ll be happy to
help.
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