Why pensions are like ice cream
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.
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.