Lowes Magazine Issue 120

PLANNING

How we have helped clients

Lowes Consultant Michael Stowe looks at the decisions we need to make at retirement, in particular how we fund our future income

APPROACHING THE END OF OUR WORKING LIVES, we need to make decisions about how we are going to withdraw funds from our pension(s), savings and investments to fund our retirement income. For many people, the best way to have an adequate income in retirement is to save gradually over the whole of their working life. How much people can save and for how long will depend on their financial circumstances and where Lowes Consultants are involved, we can help our clients to choose the best savings and investment vehicles and tax wrappers for them at the time. This could be pensions, ISAs, LISAs, investment bonds, and so forth. When it comes to taking our money in retirement, you might think that the decision making becomes easier. However, since the Pensions Freedoms were introduced in 2015, the decision- making process in fact has become far more complex. Advising clients on how to draw money in the right way from the right source at the right time, is where Lowes Consultants can ensure mistakes aren’t made and, for example, unnecessary tax bills are not incurred. But financial awareness is just part of the overall picture. Emotional preparedness is a vital factor to think about and can play a huge part in the financial considerations. Planning your retirement, knowing when that might be, and also knowing what you want it to look like, will considerably influence the financial profile of your retirement. The big lifestyle changes that retirement transition brings can be unsettling, and particularly so if you don’t have a plan in place. A well-developed retirement strategy will help give you the confidence that everything is arranged to help deliver the retirement that you want. Which assets to use first for income? Pensions may seem like the obvious place to start when withdrawing money for retirement income but since the pensions freedoms, a pension could be the last element of your savings that you want to touch. The changes to death benefits mean personal pensions can be passed on to your beneficiaries free of inheritance tax and income tax if you passed away before the age of 75. Post 75 beneficiaries can draw money from the bequeathed pension but will pay tax at their marginal rate of income tax.

Money invested in an ISA, on the other hand, is subject to inheritance tax. If your estate is likely to be over the £325,000 nil rate band, or £500,000 including the residential nil rate band where relevant, then using your ISA investments for tax free income may make sense. Any cash savings currently will be losing value thanks to inflation, so after maintaining some emergency money, using cash first again may be a sensible option. The order in which assets are used for retirement income will depend on the individual’s circumstances.

Pensions withdrawals How you draw money out of your pension is another area that matters, says Lowes Consultant Daniel Waugh. A full state pension is worth £9,339 a year. Thereafter, individuals usually have a personal pension, a final salary pension or a combination of both.

If drawing from a workplace pension proves to be a viable option, then there are various methods of drawing money from those savings. For example, if you have a defined contribution scheme, you can select a product that pays a fixed amount every month (an annuity), take a more flexible option where you can vary what you draw but the amount is not guaranteed (known as drawdown) or take cash as a lump sum. You can also choose a mixture of these approaches, again depending on needs and circumstances. Savers who have a final salary (defined benefit) pension, can choose to take their whole pension as a regular income (sometimes with a cash lump sum), often upgraded in-line with inflation, or after taking financial advice – for pots over £30k – they can choose to transfer their pension to an alternative arrangement. Final salary pensions can have different sets of rules around death benefits, so if you wish to pass on your pension to a beneficiary you may need to transfer the money into an appropriate pension vehicle.

9 Lowes.co.uk