The Freedom and Choice changes in 2015 gave people at retirement greater flexibility over access to their pension funds. Data from the regulator, the Financial Conduct Authority, shows that the amount taken from pension pots in flexible income has more than doubled over the past five years.
The greater freedoms give people greater responsibility to manage retirement pots. Salvatore Volante looks at some of the potential pitfalls and shows how he and other Origen consultants can help you to manage your retirement income.
Building your retirement pot
The level of income that you can enjoy in retirement will depend on how much you saved, how long you work and the decisions that you take at retirement.
Organisation for Economic Co-operation and Development (OECD) review of global pension systems found that UK savers can expect to receive 29% of their working income in retirement from mandatory pension schemes, which is less than half the OECD average.The outlook is improving for UK pensioners, as in 2017 1 in 7 rely on the State Pension compared with 1 in 4 back in 2008, but there is room for further improvement.
Assessing retirement income needs
Taking flexible income has grown in popularity at the same time as annuity rates have fallen, making the guaranteed income of an annuity less appealing to those approaching retirement.
But despite the popularity of drawdown, there are some concerns:
- In July 2017, the regulator identified the unadvised drawdown market as an emerging issue where consumers could be paying high charges and ending up with unsuitable investments;
- Retirees could run out of cash when using flexible retirement income options.
Old Mutual Wealth’s research found that the over-55s feel insecure about their future, with 45% worried their pension will not fund the duration of their retirement. The research showed that only 14% speak to a financial adviser.
Retirement income planning can be complex and it can be difficult to review and assess future income needs and likely investment returns. Old Mutual Wealth research highlighted the value of receiving financial advice and planned retirement income, with people who saw an adviser regularly receiving a retirement income which is 41% higher on average than those who never visited an adviser.
Managing your pension pot responsibly
Research by SIPP provider AJ Bell shows that 44% of drawdown savers are withdrawing more than 10% from their pension fund each year, but by taking withdrawals at these levels, the pot is expected to almost run out after 12 years.
If annual withdrawals are reduced to 6% of the starting fund value, the money could last for 26 years. 77% are taking more than 4% a year, the withdrawal rate which has been used as an industry benchmark for sustainable withdrawals, although sustainable income will depend on individual circumstances and investment returns.
It is worth recognising that in retirement you may have other sources of income, so a full review of income sources can really help to ensure that your assets are being used tax efficiently to provide the income you need and also to pass on your wealth.
How can Origen help?
Whilst drawdown offers greater income flexibility than an annuity, which pays a guaranteed income for life, it does have some key risks:
Investment risk – As the pension fund remains invested, it will be exposed to the risk of market falls which can reduce the fund value and can therefore reduce future income levels.
We will carry out an attitude to risk assessment and choose funds which suit the level of investment risk you are willing to take to provide your retirement income.
Longevity – Will your fund be able to provide income throughout your retirement? Generally people underestimate their life expectancy – and therefore their retirement fund is unable to provide an income throughout retirement.
We can model your income needs, setting agreed growth assumptions, and we can then determine what levels of income are sustainable from your pension fund. We can also consider the effect on sustainable income levels of any plans for larger withdrawals at a future date, for example if you are planning the holiday of a lifetime, a new car purchase etc.
Regularly reviewing the fund performance and the income levels, like servicing a car, is important to ensure that everything is still working and there are no needs for running repairs either due to changing income needs or fund performance below the assumed growth rate.
Ask your Origen Consultant to see how you can review your retirement income needs or plan your retirement income more effectively.
This article is for information only and is not to be taken as Financial Advice. CA2038 Exp. 01/19