IN THE BACK
QUICK ON THE
DRAWDOWN
You wouldn’t let the government tell you how to spend your salary, so why let them
do it with your pension?
I
can’t remember a good idea from
any government that has come to
fruition quite so quickly.
I can remember some bad ideas
that were introduced fast and some
good ideas that never happened,
but George Osborne’s “pension
freedoms” plan is here already.
And it really is a good idea. Can
you imagine if your employer, or the
government, told you how to spend
your salary? We would rise up in
rebellion. So why, until a few weeks
ago, were there strict controls over
how we accessed our pension pots?
I suspect the answer comes in
two parts. The financial services
industry is a powerful thing and
the way insurers thrived on the
“annuitisation” of people’s pension
savings was somewhat self-serving
and highly profitable. Until recently,
pensions were mysterious things
we paid into until we retired and
received some money back again.
GENEROUS SCHEMES
Some lucky people had final salary
pensions, which were so generous
they had the ability to sink the huge
companies that offered them. Those
pe nsions are as rare as a French fauxfilet now, so most of us have to use
our loaf to cobble together a decent
retirement pot.
Take me, for example, as a typical
child of Thatcher’s Britain. I’ve
worked for several companies, in
good times and bad. I’ve got a few
pensions, some from short stints at
companies where the career path
22
ended up being a career cul-de-sac.
Some of these pensions are
reasonable and some are just a few
thousand pounds. But one thing
they all have in common is that
none of them promises the faintest
hope of me walking hand-in-hand
with my lovely wife down a sandy
Caribbean beach at sunset (in
obligatory white clothes), grey
hair blowing in the warm breeze –
despite what you see on the cover
of all those Saga-style annuity
brochures. Bognor would be a
struggle. In November.
LURCHING ALONG
In isolation, each pension was
lurching slowly along, weighed
back by hefty charges and invested
in pension funds I hadn’t heard of.
What I did with these almost
forgotten pensions was repatriated
them – into my SIPP – put them
all together and invested them in
funds that are highly regarded and
consistent in their performance.
I’ll not give away my nest egg’s
value, but in the 18 months I have
cherished the money from these
pensions in one place, it has risen by
30 per cent. Combining low charges
and better performing funds has had
a big impact.
If I keep investing each month
as I’m doing, with me and my
company paying into my SIPP, I’m
looking at an entirely different
retirement scenario than the one I
was facing just four years ago.
Better still, I don’t need to stop the
loving and cherishing of my cash
when I retire. I can keep managing
it and take out money as and when
I need it. Just like I do now in fact,
while I am in gainful employment.
And because I don’t give away all
of my retirement pot to the annuity
company at 65 (or whenever) in
exchange for a fixed income for
life, I have some flexibility. If I don’t
need any money, I can leave my
investments working. If I need a
Lamborghini, I can buy one. In fact I
can do the same things I do now.
RETIREMENT PLANNER
We are building a retirement
planner for Trustnet Direct: I have
used the prototype to calculate
a scenario looking at income in
retirement from drawdown versus
some online annuity quotes. So I
looked at arriving at retirement
with a range of different amounts,
from £75,000 through to £1m
and wanted to see what monthly
income it would give me. It isn’t
scientific, but makes some sense. If
annuity providers have to budget to
provide a defined income for as long
as you live – and we’re all living
longer – they may feel like hedging
their bets (as actuaries do).
TOO GOOD TO BE TRUE
With these assumptions, drawdown
looks almost too good to be true, in
which case it may be. What happens
if your investments plummet during
retirement? Crashes have happened
regularly over the last century. Many
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