PLATFORMS
IF YOU THINK YOU RUN
THE RISK OF LOSING
YOUR INCOME DURING
THE CRITICAL FINAL
YEARS OF EMPLOYMENT,
THINK HARD ABOUT
TOUCHING THAT TAXFREE LUMP SUM
on can appreciate in a similar way to
stock market investments, although
they have similar risks and can
be more illiquid. However, if you
have spent the money rather than
invested it then your final pension
asset base will be smaller.
With a smaller pension pot at
retirement, you will have a lower
income should you choose to buy
an annuity. Your money will also
run out sooner if you enter flexiaccess drawdown.
These problems compound when
your income ceases earlier than you
had planned for and your pension
pot has less time to rebuild once
you have withdrawn your tax-free
allowance.
USING YOUR PENSION
LIKE AN ATM
Following this argument, it is
interesting to note that many
people are planning to draw
down a fixed amount each month
(simulating a salary) and they may
want to reconsider.
Keeping your pension pot
invested in the markets in these
low interest-rate times makes
more sense than drawing out cash
that you may not require. Experts
now believe that if you do need to
eat into your capital, it is best to
sell only the investments to realise
the cash you need that month
rather than a fixed regular amount
that will leave low-yielding cash
sloshing around in your account.
The great thing about flexiaccess drawdown is that you only
need to take out what you need,
when you need it.
CASH BUFFERS
There are more advanced
strategies, too. For example,
many experts now advocate
having a portfolio comprised
of an aggressive growth style
model plus a cash buffer (bonds,
money market and so on). This
will grow in rising markets and
you can draw down from this
excess amount. In down markets,
however, rather than selling low,
you can draw down from your
cash buffer, leaving your higher
risk holdings to recover.
When these assets have
recovered and grown, you can top
up your cash buffer once more.
So, the theme of this feature
is simple and consistent. Before,
during and post retirement, try to
leave as much money invested as
you possibly can to benefit from
the potential of market growth.
IMPACT OF ENDING CONTRIBUTIONS AND 25% WITHDRAWAL
ON A PENSION INVESTED IN THE FTSE 100
Starting pension pot
at age 55 (£)
Monthly
savings (£)
Retirement
age
Final pension
pot (£)
Annual
annuity (£)
250,000
250
65
502,252
25,749
250,000
0
65
458,716
23,568
250,000
N/A
55
250,000
11,013
187,500
250
65
387,109
19,959
187,500
0
65
344,037
18,281
187,500
N/A
55
187,500
8,173
Source: FE Analytics & Saga (figures to 1/07/2015)
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