One would put all his hard earned money for years into pension and make it a lump sum thinking to lead a happy life after retirement. In the past, there are very trivial chances that one would opt for one of the outlines that allowed you to access the money through provisions known as “drawdown” rather, there was a nine-in-10 chance that one might have utilised majority of the funds to purchase an annuity – the insurance plan which becomes an earning for lifetime – and that might have been that.
But as per the new flexible plan defined by George Osborne last week, there are various ways one could use his savings like investing in buying assets , or one can still go ahead buying annuity, Or could invest in self to realm its value and make revenue. Or could groove the pension simultaneously as well as invest the money as wish to. This policy would come into full effect next year.
Alan Higham an expert in retirement income planning at Fidelity, the asset manager, said: “What has not changed is that the typical person has not saved enough. New rules allow more flexibility about how to manage that situation. Whatever the right choices are for that person, the key point is that they cannot afford to lose any money.”
Joss Harwood of Eldon Chartered Financial Planners said: “Most will have to find solutions to a difficult question: how will my current financial situation, in terms of pension and other savings and various forms of income, sustain me for the rest of my life? That is the basis of all financial planning.”
One would get confused with the allegations to put the amount in investment and the tax; there are both plusses and minuses here. The benefit here usually is capital gains generated on ones investments are not going to be subject to taxes and the drawback is that one cannot invest in all kinds of assets inside a pension.
It is very important for one to know the basic tax position. The major brake to any one is that when the person wants to withdraw large amount at once as one would get highest rate of tax relief during the savings and high rate of tax will be applied while withdrawing the amount by considering it as income.
To buy a property, one has to first take the money out of the pension and then have to pay for it; he will not have an option to buy it directly.
Pension investment plans has to be made depending upon the individuals assets, if a person with larger pension assets there may be an option that they are going to outlive their financial savings so they have to plan accordingly as the assets will also form part of their estate. Below are few of the pension schemes and the risks involved and likely returns.
Annuities may be seen very less, going forward in the new world of pension because of the drawbacks it has and many would look for other alternatives such as retail bonds. But for few they are still one of the choices. Annuities guarantees that the income, however measly, will not run out before the owner dies.
Annuity pays very low amount. For every £1,000 spent, it pays at about £60 per year. So if anyone with a £100,000 pot would get a monthly £500. This could be a “level” annuity – not associated with future inflation. In case you chose the safer, inflation-linked policies, the starting payout could be more affordable at 3 .4pc or £280 per month.
On the death of the main policy holder, incase if the spouse is added, would receive only half the income and the rate further reduces. But this suit for the people with any health problems depending on their condition, they could get 10% more.
“The issue is about risk,” said Ms Harwood. “What the annuity does is eliminate that risk, which, for some, is a price worth paying.”
- Annual returns: 5pc-6pc
- Inflation proofing: Good (for index-linked policies)
- Capital risk: Low
Low risk portfolio of bonds and shares
One can reduce the chance of pension pot loosing value in shorter periods by including a large chunk of bonds but the drawback is that mixing leads less chances for income growth and neither will the capital have the same break to grow over longer periods.
However, one can create a portfolio in which 60pc of the money was invested in popular bond funds, or directly in corporate bonds and other 40pc could be invested in equity funds.
Financial adviser Brian Dennehy of Fund Expert, the fund tipping website, said: “Bonds’ primary role within a portfolio is as a stabilizing influence. If your long-term aim is a growing income stream, this will not be as suitable as a portfolio with more invested in dividend-paying equities.”
- Annual returns: 4pc
- Inflation proofing: Moderate
- Capital risk: Moderate
Higher risk portfolio of bonds and shares
For the people with healthier pensions and are not likely to need to take capital out of their pot, can go for share-based funds such as prevalent “equity income” portfolios wherein they can invest 70pc of the pension pot.
To keep your brook of income increasing over time and leaving the pension capital unbroken, one has to concentrate on the companies committed to paying dividend income.
Research by Sarasin, the specialist investment manager, in his survey has found that, dividends paid on shareholdings grew by an average of 6.4pc a year, comfortably beating inflation over the very long term. In the past decade, however, dividend growth has averaged 3pc, which the company said was “unusually poor”.
Mr Dennehy said: “The safest way to take income from a portfolio is only to draw the ‘natural’ yield, which is the dividend yield. That leaves the capital intact. If you invest in sound equity income funds, such as Artemis Income, the actual dividend payments are very consistent indeed, even if the capital value fluctuates over time.”
- Annual returns: 5pc-6pc
- Inflation proofing: Very good
- Capital risk: High
Keeping pension assets in cash stances a slow-burn risk. Cash yields a negative real return, after basic rate tax.
The long term profit on cash is considered to be much greater than rates currently available on short-term deposits. Today, 1pc is modest for easy-access accounts and the best three-year deals don’t even pay 3pc. Before tax, the very long-term return on cash is 3pc.
Ms Harwood said: “People instinctively see cash as a safe option, but it’s straightforward to demonstrate the corrosive effect of inflation. The safety isn’t really there.”
Other experts go further and talk of cash as “dangerous”.
- Annual returns: 1pc-2pc
- Inflation proofing: Very poor
- Capital risk: Low
Retail bonds are taking a lead with the day by day increasing awe on investments. Retail bonds are said to be the loans that individuals can make to companies which comprises major corporations such as RBS or Tesco Personal Finance.
One can buy a bond and have the details like how much income it will pay each year and when would it pay you and the bond maturity date. These are the main advantage on managing pension pot in retail bonds. Other added benefit is that your capital would be returned, if the company relics successful business.
Paul Killik of stockbroker Killik & Co said: “For a retired person, corporate bonds are exactly what’s required. You can get a similar payout to what is available from an annuity, the difference being you get your capital back at a set time. That gives you some welcome certainty.”
Though there are risks involved on the payments of retail bonds, the “safest” companies’ bonds yield between 4pc and 5pc, and can go to 6pc sometimes but there is a risk to capital income here.
Mr Dennehy said: “The danger of these bonds is they are all or nothing. “The company is both fine, and pays back the capital as promised, or something goes wrong and all the bondholders’ capital could be lost.”
- Annual returns: 5pc-6pc
- Inflation proofing: Medium
- Capital risk: Medium to high