Pensions
Pensions are financial tools whose purpose is the provision of money for use in retirement because it is considered good public policy to try and get people to save for their own retirement (rather than rely on the State).
Over the years, however, governments have changed the system so much that it is all highly complex (much more complex than it should be).
The good news is that we are living longer. So, very often, we are living in retirement for longer. The not so good news is that in the future, it is unlikely that the state will be able to fully support a far higher proportion of the population as pensioners.
The answer is good pension planning for everyone, and it’s more important than ever.
Should I get pension advice
There are various types of pension plans designed to help you save for retirement. Workplace pensions are typically arranged by employers and include contributions from both you and your employer. Personal pensions, such as stakeholder pensions or Self-Invested Personal Pensions (SIPPs), offer more flexibility and control over how your money is invested. Additionally, the State Pension provides a foundation of retirement income based on your National Insurance contributions. Each of these options comes with different features and tax considerations, so understanding how they fit into your overall financial plan is essential.
In addition, there are so many pension options available that choosing the right path can seem like walking through an overgrown garden maze at night. That’s why people come to us, and our advisers will help you snip away the branches and hand you a torch, so you can choose your path with confidence.
Getting pension advice is important because pensions are complex, long-term investments that directly affect your financial security in retirement. Professional guidance helps you make informed decisions, avoid costly mistakes, and maximise the value of your savings.
Unfortunately, over the years, pension types, rules and restrictions on pensions have changed and being armed with the right knowledge and advice is paramount since it is usually very difficult, if impossible, to undo a pension benefit decision once it has been processed.
With most pensions, you will be faced with options prior to receiving any benefits. Each option may have different risks and tax implications.
Our advisers will help with: –
- Tax Efficiency – Our advisers can help structure withdrawals to be tax efficient which will minimise tax, ensuring you don’t pay more than necessary.
- Investment Management – Typically, pension funds are invested in the global stock markets. Getting our advice will ensure your investments match your risk tolerance and retirement goals.
- Avoiding Mistakes – Poor decisions—like withdrawing too much too soon—can leave you short of money later in life. Getting our advice can help create sustainable income strategies.
- Maximising Benefits – Our advisers can guide you and check if you are entitled to additional benefits (like the State Pension or tax relief) and ensure you don’t miss out.
When should I get pension advice
It is never too soon to get pension advice. Technically, you can start a pension from the day you are born via a parent or guardian. If you are unhappy with your current pension, or just want to learn more about it, or you are considering switching providers or do not want to manage multiple pension pots. Getting the right advice could reduce the stress of managing the pensions in the future and should also enhance your retirement provision.
Many people get pension advice just to make sure they do not miss an opportunity to grow their pension through better investment choices, do not run out of money too early due to poor withdrawal rates, and do not make irreversible decisions (e.g., buying an unsuitable annuity).
Pension advice is essentially about turning a lifetime of savings into a secure, sustainable income. It’s not just about numbers—it’s about peace of mind and protecting your future lifestyle.
Are you currently in an Investment Accumulation or Decumulation phase – Does this need planning
What is the ‘Accumulation’ phase
Life is not predictable; no one knows exactly what is around the corner. Changes can happen at any point in time and very quickly. You may become unemployed or get a big promotion. Your relationship could break down, you may get divorced, or you may win the lottery. When most people think about ‘investing’, they think about saving, investing and growing their wealth for a future goal, typically for retirement. During the accumulation phase, individuals focus on building and managing three types of wealth to maximise their retirement benefits using financial wealth, retirement wealth, and home equity.
Throughout the accumulation phase, you will face many unpredictable risks that will affect your finances, and our advisers will help guide you through the good and the bad times. One of the main reasons clients engage with financial advisers is to help them invest in ways to achieve their desired lifestyle in retirement.
What is the ‘Decumulation’ phase
Decumulation is not merely the opposite of accumulation; it requires a nuanced understanding of market dynamics, regulation, risk management, and personal financial goals. The decumulation phase begins when an individual starts withdrawing or taking income from accumulated assets, usually when they decide to retire fully or partially from work. Unfortunately, retirees often struggle to fully control and harvest the full benefit of their accumulated wealth during this phase.
Decumulation could be triggered with an event like retiring from work, transitioning to part-time employment, the death of a wage-earning spouse, or a divorce. These events require the client or the household to withdraw assets for income and financial security. During this decumulation phase, retirees face several challenges requiring careful planning and strategising.
One of the primary challenges is identifying the most tax-efficient ways to sell assets and make withdrawals. This involves considering the tax implications of different investment accounts and determining the optimal order for liquidating assets to minimise tax liabilities. Only an integrated set of strategies at the household level can address these challenges and develop a comprehensive, sustainable decumulation plan.
Protecting wealth and retirement income from inflation is also a significant concern during decumulation. Retirees need strategies to ensure their income keeps pace with the rising cost of living. Lowndes Halsden provides integrated retirement decumulation solutions that maximise post-tax retirement income.
Transitioning from the ‘Accumulating’ to the ‘Decumulation’ phase
In the decumulation phase, retirees transition from saving and investing to generating income from their retirement assets to support their living expenses. They may rely on various sources of retirement income, such as State and non-state pensions, annuities, and distributions from multiple savings vehicles.
The old and outdated strategies for guiding clients in the decumulation phase involve withdrawing a percentage from all available invested assets annually (based on the 1990s Bengan’s 4% rule). The main flaw with the old strategies is that they overlooked the impact of risks associated with decumulation, such as sequencing risk. Sequencing risk is the risk that a large market fall may occur before withdrawing short-term funds, which would significantly devalue the investment and realise potentially harmful losses. Relying solely on the “4% Rule” is inadequate for minimising sequencing risk.
Also, no one should assume that an unsustainable withdrawal rate (over 4%) will yield a poor outcome, especially if you have multiple sources of income. You may want to be more active during early retirement, and you could have numerous savings pots and aim to deplete one before touching others. Higher withdrawal rates are sometimes used as a bridging pension until you reach your defined benefit pension or state pension age. Therefore, the ‘appropriate’ drawdown rate depends on your own specific personalised goals and wider financial circumstances.
The accumulation stage, which usually has a key objective of producing capital growth, may likely change to a more income-based approach with some capital growth, as you transition from adding further money to invest to in decumulation, either a lot less or no additional money will be added. Your capacity to absorb falls in the value of your investments, in decumulation, without creating a detrimental effect on their standard of living will quite likely be reduced. Taking an income from a stocks and shares type investment while the markets have fallen could incur unnecessary losses, and as our advisers will clearly explain, investment returns never form a smooth, straight line on a chart; there is always an element of volatility. If volatility in retirement creates a major concern for you, an annuity could be a better option as long as you understand all the pros and cons of an annuity or the use of a strategically planned decumulation strategy.
What is a Decumulation Strategy
A decumulation strategy is a personalised blueprint for drawing down on your assets over time. It must be tailored to your (and your spouses’) circumstances and aim to achieve what you say you want the most, which may include ensuring you do not outlive your assets.
When developing a decumulation strategy, our financial advisers engage in discussions with you to gather important information, such as fixed and variable expenses, part-time work and health considerations. Your adviser can help ensure your decumulation plan accounts for these essential costs. This information allows for more accurate calculations of the income needed to cover these expenses and assists in designing a sustainable retirement income strategy. If you desire to leave legacies to your family or charitable organisations, it is important to consider the effects of your asset allocation and distribution strategies.
By understanding your income expectations, evaluating your assets, and discussing potential lifestyle adjustments, your adviser can create a decumulation strategy that aligns with your goals and maximises your financial outcomes. These conversations provide crucial information for effective decumulation planning.
A decumulation strategy will also emphasise examining the expectations, evaluating assets, and counselling you when you may need to adapt your plans to produce the best results. This adaptability can play a vital role in creating a decumulation plan that aligns with your goals and maximises your financial security in retirement. This plan will enable you to convert assets into income needed periodically during retirement. This may enhance the scope for further tax efficiency optimisation while aligning the income generated with your financial goals. By considering factors such as life expectancy, expected longevity, and other income sources, our advisers can you make informed decisions about the most opportune time to begin claiming their State Pension, possibly using a decumulation portfolio strategy to reduce sequencing risk and the timing of the actual investment withdrawals.
Proactively addressing tax considerations during the decumulation phase will include analysing the tax implications of various investment decisions, understanding the tax-efficient ordering of asset sales or withdrawals, and exploring tax optimisation opportunities such as utilising tax-advantaged vehicles. By incorporating tax management strategies into the decumulation plan, our advisers can help you maximise your after-tax income and improve your overall financial outcomes during retirement. However, the timing of withdrawals could have a massive impact on the amount of tax payable and the losses that may be realised when markets have fallen, so getting the right advice is paramount.
Sequencing risk seems to be a big risk in the ‘Decumulation’ phase – Can this risk be reduced
Planning is key to minimising sequencing risk since avoiding withdrawing funds when investments may have fallen could make your investment income last longer. This is important since our life expectancy compared with many years ago has increased, and investment pots will need to last longer than ever.
Lowndes Halsden has developed an innovative two-portfolio structure to address the risks of decumulation and help you meet your long-term income needs. Several investing risks, including inflation, longevity, and sequencing risk, should be considered since they can impact your income differently. Lowndes Halsden can offer a unique bespoke retirement income solution that provides more stability by dividing your investment into short-term and medium-long term components, ensuring a tailored income stream for you.
Our short-term decumulation portfolio aims to provide the short-term income (2-5 years) while reducing sequencing risk and shielding you from downturns in the market, but your capital may still be at risk. Even though the use of decumulation portfolio is usually a lot lower risk than a typical client’s medium-long term portfolio, the primary objective of this portfolio is not for growth but for capital preservation.
All of the above can be discussed during an appointment with your adviser. For more information about any of the above, please email us using the Contact Us page.