Your IndustrySep 23 2015

Blending retirement income options

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Advisers can then discuss with a client how the rest can be used to invest for growth or spend.

So, for example, Mark Stopard, head of product development at Partnership, suggests considering the following example. Mr and Mrs Smith are both 65 and need an annual income of £15,000 to enjoy their retirement.

They have a combined guaranteed income of £11,300 made up of state pension of £7,800 a year, civil service pension of £2,000 a year and a defined benefit pension of £1,500 per year. According to Mr Stopard this leaves a shortfall of £3,700.

They have a combined private pension pot of £120,000 and use £70,000 to buy a joint-life enhanced annuity, which provides an income of around £4,000.

This leaves £50,000 to invest/spend on other priorities.

Simon Massey, director of wealth management at Metlife UK, says clients should consider their pension pots as four asset classes – equities, fixed interest, cash and a guaranteed element.

As FTAdviser’s Guide to Boosting Retirement Income explains, with providers so far failing to develop any radical new products, most other “new” ways to turn pension cash into retirement income existed prior to 6 April, but have gained greater prominence and been tweaked to fit the new ‘free’ world.

Taxing cash decisions

The only genuinely new way of generating a retirement income is the ability to take cash without limits. Retirees can take the whole pot at 55, or take ad hoc lump sums through the new uncrystallised fund lump sum option.

Of course, most would continue to use the 25 per cent tax-free lump sum that becomes available when they hit 55 as the rules have not changed for those going into drawdown. Uncrystallised fund lump sums would include a 25 per cent tax-free portion in each payment.

Those seeking to take cash need to be aware of the downsides, namely that they could run out of money if the withdrawal plan is not carefully managed and that they could face hefty tax charges.

All new withdrawals will be hit with emergency taxes initially and are generally taxed as income.

But taking cash sensibly and using tax-free allowances enables clients to manage their tax bills by changing their income levels to accommodate other sources of income, some experts argue.

Other savings

If a client wishes to, they can invest in other savings vehicles as an alternative to a pension. It is hard to get away from the fact that the more an individual saves, the more retirement income they will have to work with.

This fundamental principle is not changed whether someone saves in a pension, a savings account, an Isa or another savings vehicle.

A pension requires a client to ‘lock away’ their money until they are at least 55. An attraction of a pension, however, in comparison to the other methods of saving is that the client benefit from the application of tax relief on all saving contributions.

Also, if they are saving in a workplace pension, it is most likely they will also benefit from an additional contribution from their employer.

Of course, many will already have Isas when they hit retirement and the choice is simply whether to access this ahead of their pension.

The answer might depend on whether you wanted to pass on the pension fund in the wake of the abolition of death charges - if so, you’ll probably want to run down all your other sources of wealth and leave the pension untouched.

Property

One of those other sources of wealth - in fact the key wealth holding of many older savers - is property. Approximately one third of the UK’s property wealth is controlled by baby boomers, for example.

Homeowners could downsize to release a lump sum to invest or live from, while equity release is also increasingly popular.

One of the key appeals of equity release allows the client to release money from their property, while still living in it.

A client can either borrow against the value of their home or sell all or part of it in exchange for a lump sum or a regular monthly income.

What is obvious from past complaints about this product is no assumptions should be made about what the client’s family were expecting to receive as an inheritance.