Retirement income: How to make your money last?

Posted by Peter McGahan

The value of pension funds have fallen through the floor in recent years, so how best can you ensure that every penny of your money counts.

Money in retirementIt seems with its miscalculations and a national insurance pot that doesn’t exist, the government will have to tax its way out of the problem.

For those who had believed that national insurance was a way to protect your income for the future through the security of a’state’ pension, and that after 45 years of tax paying things would be a lot easier, retirement will have come as a bit of shock. There are a few things to consider just before retirement and also in retirement to ease the tax pain.

If you have a pension that has a guaranteed annuity be very careful when you come to retirement and are ready to take the income. A guaranteed annuity is often thought of as something to protect, but in virtually every situation I have seen, the guarantee is worthless.

A guaranteed annuity is often in the form of a high annuity (that’s the percentage return you will receive from your insurance company every year for life). The last one I saw was for a reader whose annuity was 9.64 per cent which is close to 50 per cent more than today’s ‘normal’ annuity given the extraordinary low rates we are receiving at the moment.

However it was only when we looked at the finer print for the reader that we realised the annuity had two serious flaws: Firstly the income had to be taken as a level income for life, and secondly the pension died with the reader as it could only be taken as a single life.

So although the reader had a perceived ‘good’ income at 9.64 per cent they did not take it. If inflation roared on it would soon erode any benefit of the higher income due to the reader only being paid a level income. However, and more importantly, if the reader had died the day after taking their income, every last penny would have been lost and their spouse (wife in this case) would have received nothing.

So before securing your guaranteed income, or if you have a pension with which you believe you have a guaranteed income, and are a long way from retirement, be sure and seek some independent advice from a fee based adviser. You’ll probably find, as was the case with the reader, that the pension’s charges were also extraordinarily high. And if you were triply unlucky, the death benefit pre-retirement was a return of premiums rather than the actual fund value.

Having chosen the correct annuity there are a few tips to consider with the remainder of your cash. Use the most tax and charge efficient solutions with your investment.

An investment bond is the most sold investment in the financial services industry. In my experience within the last 22 years I have yet to see a customer who has been to a bank who was not sold an investment bond. At commission levels of 7 per cent or even 8 per cent its easy to see the motivation, but it is the most tax inefficient and charge inefficient way you can invest.

Use your ISA allowance and when you invest, set aside enough for the following year’s isa too.

A unit trust allows you to have capital gains allowances each year of £10,200, and that’s per person.

The average investment is less than £100,000, so most investors could use the capital gains tax allowance easily per year.

For example, if you had a gain of 20.4 per cent on your joint £100,000 investment in a year and you turned that portfolio over at the end of the year it would be tax free.

An investment bond however, pays tax as it grows and it is not reclaimable.

Be sure to ask your bank adviser to explain in writing exactly why they believe an investment bond is more tax efficient than a unit trust/oleic, or investment trust before you consider investing.

From a point of view of efficiency, many investors are using a wrap as a method of holding their investments and this is a very charge efficient way to buy your funds.

The individual collectives (the funds) can often be bought at creation price (the closest you can get to zero pricing). A wrap also allows you to look daily at every single investment you have in every fund.

Moreover, reviews with your adviser can be held in the most cost effective way as you can both look at your portfolio online and discuss remotely rather than having expensive meetings. Within the next five years I am confident that most investments will have migrated to wrap to benefit from this.

Finally if you are looking to maximise the income from your investments, consider the two main options. One involves maximising the income from income producing assets and the other involves making your capital grow but then stripping out the capital growth. Both are very different in their impact on your capital.

And don’t bother too much about leaving money for the kids, they’ll only have a tax problem to worry about. Enjoy your retirement.

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