Retirement income planning used to be so simple. You worked hard, you saved your pot of money, then when you retired you more than likely took a nice little lump sum and handed the rest to an insurance company in return for an income for life.
Our Chartered Financial Planner, Neil Winstanley explains how you can retain control of your pension funds. Today, rates for annuities (your income for life) are on the floor and the newly-granted pensions ‘freedoms’ now mean you can structure your income in retirement however you like, without being subject to a government-imposed cap on withdrawals.
But herein lies a very important question: if I want to retain control of my pension funds, accessing them flexibly as and when I need to throughout retirement, whilst also taking advantage of generous tax benefits on death, then how do I ensure I have enough money to last the rest of my life?
Sustainable withdrawal strategies
Over the past few years, much work has been done on the development of sustainable withdrawal strategies. Approaches to this differ. Some recommend keeping a few years’ income in cash, then applying different risk profiles to different tranches of pension funds, others swear by a single, multi-asset approach. Yet more invest strictly in dividend-income funds as these have delivered inflation beating returns consistently over the last 100 years.
We also see packaged solutions on the market designed specifically for clients looking for sustainable retirement income – these vary from products offering a ‘guarantee’ or building in a ‘smoothing’ process, to model portfolios managed on a discretionary basis.
Identifying retirement needs
Each client is unique and therefore what works for one person will not necessarily work for another. The starting point for an Ascot Lloyd adviser is to identify what kind of retirement our client wants – what is important to them, how do they want to live, what shape do they want their retirement to take?
Retirement income planning isn’t so simple any more, but Ascot Lloyd advisers are trained to help you navigate these choppy waters and behind them stand a fantastic team of paraplanners and tax specialists.
Cash flow modelling
Cash-flow modelling is a key part of this exercise. This involves building a visual plan in the form of a bar chart that takes account of personal goals, assets, expenditure and all sources of income. Amongst other things, we can factor in state pension, inflation, assumed growth rates, taxes, lump sum expenses and gifts to family. We can also stress test plans to allow for market volatility or test the robustness of the plan. Given that life expectancy for a 65 year-old is roughly 20 years, the risk discussion is also key.
Volatility will always accompany investing and one thing to be especially wary of is something called sequential risk (basically, the order of returns on a portfolio). Inflation, as ever, is crucial, particularly if you want to maintain a standard of living to which you have become accustomed. Added to these, each individual will have differing levels of capacity for loss (an individual’s ability to withstand financial loss to the point where it starts to impact their standard of living).