Financial Planning, Pensions Advice, Financial Adviser Dunfermline, Fife, Edinburgh and Central Scotland

Wednesday 18th September 2019

Since 2015, retirees have had far more control over their pensions. Rather than purchasing an Annuity, more are choosing to leave their pension invested. This has benefits and can help you build a flexible income, but there are things to keep in mind too.

Figures from HM Revenue and Customs (HMRC) revealed that in the second quarter of 2019, retirees withdrew £2.75 billion from their pension flexibly. It represents the greatest amount withdrawn in a single quarter since Pension Freedoms were introduced. In total, £28 billion has been withdrawn flexibly over the last four years.

From the age of 55, you’re now able to start accessing your pension whether you’re ready to retire or not. One of the options open to you is Flexi-Access Drawdown. This is a pension product that allows you to make withdrawals that suit you, altering the amount and choosing the time. The capital that remains in the pension is typically invested. As a result, more retirees are now having to consider how to manage investments.

The pros and cons of Flexi-Access Drawdown

Before we look at managing investments in retirement, it’s important to recognise that Flexi-Access Drawdown isn’t the right option for everyone. As with all financial decisions, there are pros and cons to weigh up, as well as alternatives to explore.

Pros:

  • You’re in control of the income you take and when you make a withdrawal
  • As the money remains invested, there is potential for the value of your pension to increase
  • You can choose the level of investment risk you take with your retirement savings
  • It can provide you with a tax-efficient way to pass on wealth if your estate may be liable for Inheritance Tax

Cons:

  • You will need to take responsibility for ensuring withdrawals are sustainable
  • Investment can decrease in value and short-term volatility may have an impact
  • You will need to consider life expectancy when calculating how much can be withdrawn, as well as considering what will happen should you live longer than average
  • You will need to understand how withdrawal levels and when you make them will affect your tax position

If you have any questions about the pros and cons of Flexi-Access Drawdown, please contact us.

Flexi-Access Drawdown is still relatively new but analysis looking at the last four years suggests many retirees will have profited.

According to Aegon, an individual with a £400,000 pension taking a £20,000 annual income from day one of the Pension Freedoms would have seen their pot grow by £62,000 after four years in the ABI Global Equities sector. This is despite the impact of £80,000 of income payments. The same retiree invested in the UK Equity Income, Mixed Investment 20%-60% Shares sector average and Global Fixed Interest, would have seen some erosion to the capital. However, crucially, such erosion was less than the total income taken in all three cases.

The analysis illustrates how leaving a pension invested can deliver returns for retirees, but it should be noted that this will depend on individual circumstances and the assets the pension is invested in.

So, if you do decide to go ahead with Flexi-Access Drawdown, what should you keep in mind?

1. Risk profile

As your pension remains invested, it’s important to consider the amount of risk you’re taking. Traditionally, it was common to decrease the level of risk as your approached retirement age, when it was then withdrawn. However, longer retirement and changing lifestyles mean this isn’t always suitable for those considering how to access their pension today.

As with all investment decisions, the level of risk you take with your pension should consider a range of factors. This may include your overall attitude to risk, other assets you hold, how long you expect to be accessing the pension for and when you’ll make withdrawals. There’s no single solution to the level of investment risk you should take when retired, it’s one that should consider your personal circumstances.

2. Impact of volatility

Investments will experience volatility. But how should you respond to this when you’re withdrawing an income from it?

If you choose to, you can continue taking an income as you planned, despite volatility. However, this can mean your savings are depleted far more quickly than you planned and place future financial security at risk. Should investment values fall, for example, you’ll need to sell more units to achieve the same level of income. In turn, this can mean investment returns don’t meet expectations.

Adjusting the income taken in line with investment performance can help you stay on track and ensure your pension will continue to support you throughout retirement.

3. Financial safety net

Having a financial safety net is often cited as important during your working life and it’s no different when you retire. How will you cover unexpected bills or expenses? If investment performance falls, will you be able to reduce the income taken from a pension and still maintain your lifestyle?

If your retirement income is invested, it’s important to understand the financial safety net you have in place. It can give you peace of mind and the confidence to fully enjoy your retirement. A financial safety net is likely made up of different assets, but may include an emergency savings fund, the State Pension or a guaranteed income from a Defined Benefit pension.

4. Life expectancy

Using Flexi-Access Drawdown means you’re responsible for making sure your pension lasts for the rest of your life. That can be a daunting prospect and your life expectancy should be directly linked to the level of income you take. There are two important things to keep in mind.

First, most people at retirement age underestimate how long they’ll live for. According to a report from the Institute of Fiscal Studies, those in their 50s and 60s underestimate their chances of reaching age 75 by around 20% and their chance of reaching 85 by 5-10%. It’s a mistake that could mean you run out of money during your later years.

Second, whilst looking at average life expectancy can be useful, you should keep in mind many people exceed this. Thousands of people celebrate their 100th birthday every year in the UK and it’s a trend that’s on the rise. Your financial plan should consider what will happen if you lived longer than average, as well as how to pass on wealth that remains.

If you want to discuss how Flexi-Access Drawdown may suit your retirement plans, please get in touch.

Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.

The value of your investment can go up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.