Tag: drawdown


Drawdown tax and flexible retirement income. What does it all mean?

Once you reach 55, a whole spread of opportunities will open themselves up to you. One such bonus is the fact that you can finally access that hard-saved pension fund. Up to 25% of your savings can be taken tax-free, with the remaining 75% being subject to income tax. The payable amount depends on your total income for the year and your tax rate. This is known as drawdown tax. 

You’ll only have to pay tax if you decide to draw over the 25% threshold. In this case, any income you take will be added to the rest of your taxable income for that year, and will be taxed at 20% after you pass the personal threshold. Therefore, if you were to take out a large withdrawal pushing you into the £40,000 to £150,000 bracket, you could be taxed at 40%. 

Your pension provider is required to deduct any tax before a withdrawal is paid and it’s likely that when you take a taxable payment for the first time, you’ll be taxed using an emergency tax code (it may be worth speaking to your pension provider about how you will be taxed). 

How do you manage your pot? 

If you choose to stay within the 25% lump sum, more often than not you’ll move the rest into one or more funds that allow you to take a taxable income at times to suit you. It’s wise to choose funds that match your income objectives and your attitude to risk, as the income you receive might be adjusted periodically depending on how well your investments are doing. 

You can also move your pension pot gradually into income drawdown. The 25% bracket still applies to each amount you move across, so you can take a quarter of the amount tax-free and place the rest into drawdown. 

A way to make your retirement income more flexible is to invest in an annuity or another type of income product, such as a gilt or corporate bond, which usually offer guarantees about growth and income. 

However, it’s paramount that you carefully plan how much income you can afford to take under pension drawdown as you don’t want to run out of money. Factors such as living longer than expected, taking too much out too early and poor investment performance can potentially hinder your drawdown plans. 

That’s why it’s important to regularly review your investments.


Pension drawdown in an era of long life expectancies

Pension drawdown in an era of long life expectancies

Retirement planning means taking into account a whole host of factors. You have to navigate tough questions like, ‘What will the impact of inflation be?’ or ‘When will interest rates start to creep up?’

As well as these, there is another question that must be considered: ‘How long will you live?’

This question is unanswerable but figures suggest that some pensioners might be getting this figure very wrong when it comes to drawdown. Many are running the risk that their retirement pot kicks the bucket before they do.

Research by AJ Bell indicates that 50% of people aged 55-59 who’ve entered income drawdown say they have only enough savings to tide them over for 20 years. This might sound like a long time but when you consider that average life expectancy for this cohort of savers is 82 for men and 85 for women, many risk running out of money.

The reality is that none of us know how long we will live. When you factor in that there’s a fair chance that a few of AJ Bell’s respondents might live to 90 or even 100, it’s clear that many pensioners could be drawing from their savings at an unsustainable rate.

Withdrawal rates

AJ Bell also asked their respondents about their withdrawal rates. They discovered that 57% of people in the 55 to 59 age bracket are withdrawing more than 10% of their fund each year. This reduces to 43% of people in the 60 to 64 age bracket and 34% of people in the 65 to 69 age bracket.

While many use their early retirement to travel and embark on their larger plans, over-withdrawing early on could mean that they end up without the money to cover costs that arise in later life, such as care costs.

The average size of the fund in AJ Bell’s questionnaire was £118,000. Based on this, a 10% annual withdrawal of £11,800 would result in the income lasting just 12 years. However, if the withdrawal is reduced to 6% of starting value, the same fund might last for 29 years. These estimations don’t take into account the detrimental impact of inflation, which currently runs at 2.7%.

Working out a sustainable drawdown rate is difficult and depends on a whole range of factors. Your regulated financial adviser or planner should be able to give you your best chance of a good retirement outcome.

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The New Pension Freedoms Checklist: Four Things You Must Do Before Making Any Decision About Your Savings

The new pension freedoms are great news for savers, with more flexibility and options for retirement now available. However, the freedoms also come with a level of risk, particularly for that first wave of savers looking to exercise their new rights in the next twelve months or so.

The main recommendation for savers is to seek independent financial advice. An adviser will be able to talk you through your options and ensure you get value for money. Whilst you weigh up your decision though, here are four more things to add to your checklist and consider carefully alongside any decision you make about how you’ll receive your pension income.

Make sure you factor in, but don’t overestimate, your state pension

It is important to remember that, alongside your private pension savings, you will also probably benefit from a state pension in your retirement. Where once it might have been tempting to rely on the state pension, now it is more readily expected that your personal savings will be your main source of income in retirement and the state pension a nice ‘bonus’.

With this as your model, it’s important to remember the income the state pension will give you when planning for your retirement, but at least equally important to not overestimate the contribution the state will make. Factor a realistic figure into your plans, alongside the income your personal pension will generate.

Don’t underestimate your lifespan

It is very common for retirees to underestimate their own lifespan and, by extension, the amount of money they will need throughout their entire retirement. Whilst it is, of course, a difficult factor to put any sort of prediction on, it is vital that you plan for a long and happy retirement, rather than risk trying to ‘get away’ with having less capital available to you. When planning your retirement income, make sure you’re planning for the long term!

Consider tax carefully

If you are looking at the new pension freedoms with some eagerness then don’t forget: whilst the taxation implications have been reduced, they have not been eradicated entirely.

After the first 25% tax free lump sum, withdrawals from your pension will be charged at your normal rate of income tax. If you are still earning an income, or if you make sizeable withdrawals in a tax year, then this could mean you enter the upper tax bracket.  Be very careful on how the provider tax the pension, you could be waiting some time to get back any over paid tax.

Of course, if what you are planning for your pension income requires this level of withdrawal, then it may well be worth that level of taxation, but take care and make sure you have planned for, and are aware of, the taxation implications that your actions will create.

Work out what you want to do with your money, rather than just trying to get the highest amount

Perhaps the most important point of all! Whilst money is important to each of us, ultimately it is merely an enabler. There is no better aid to a happy retirement than clearly planning how you want to spend your money: the things you want to buy, the experiences you want to have, the family you want to help.

Once you have planned what you want to do with your retirement, money decisions become much easier. Will accessing your pension through the new pension freedom arrangements help you get to where you want to go in your retirement? More so than any monetary factors, this is arguably the most important question for retirees to attempt to answer !


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Ten things to do to make sure you can live on your pension

It pays to be prepared as retirement nears – be prepared for change and the inevitable decision-making. The Money Advice Service recommends that from about two years out, you should start thinking about your options and planning for the choices you’ll need to make. Consider getting professional advice because there are decisions that will shape your income and lifestyle for the rest of your life.

1 – Work out your likely retirement income. Your annual pension statements, or pre-retirement information from your pension provider or providers, will give you an estimate of the kind of pension income you can expect in retirement. You’ll need to request a forecast of your likely State Pension entitlement, and you should also take account of any income you might have from other savings, investments or assets.

2 – Shop around to get the best pension income for you. The most important thing you can do in the run-up to retirement is to shop around to find the best pension income – both the right kind of income, and the highest income of that type that’s available on the market. Most people buy a lifetime annuity with their pension savings, which means it’s a decision that affects their income for the rest of their life. It pays to get it right – shopping around can boost your income by 20% or more, and once you’ve bought a lifetime annuity you generally can’t change it.

3- Decide which kind of pension income is right for you. Most people need to know they have a minimum level of guaranteed income for life, so they purchase a lifetime annuity with their pension savings. Be aware that a fixed pension income will decline in value over time as prices rise. Consider ways of coping with inflation, such as an annuity that pays a rising income, phased pensions, or saving part of your income now to draw on in retirement.

There are other features to consider when choosing a lifetime annuity, depending on your preferences. For example, do you want your pension to provide for your dependants after you die? Do you want to link your income to the ups and downs of underlying financial investments? You may want to consider income options other than lifetime annuities, such as fixed-term annuities or income drawdown.

4 – Don’t miss out on an enhanced annuity if you have health problems. In most instances – such as buying life assurance – declaring any health problems can reduce your benefits and increase your costs. But the reverse applies when it comes to buying an annuity. If you have health problems or an unhealthy lifestyle, you may be entitled to a higher pension income. Many people who are entitled miss out, so make sure to check your position!

Decide whether to take some of your pension as a tax-free cash lump sum. You can take a portion of your pension as a cash lump sum when you retire. For most people, a quarter of their pension savings can be taken as a tax-free payment in this way.

Most people take their full tax-free entitlement, but this has a knock-on effect on the income you’ll get in retirement, so consider carefully what you can afford and how you’ll use any lump-sum payment.

5 – Decide when to retire and take your pension. The most likely reason to postpone your retirement date is to boost the pension income you’ll get. There are no absolute guarantees, but in general if you retire early you’ll get a lower pension income and if you delay retirement you’ll get a higher pension income. You can’t take the State Pension early, but if you defer it you’ll get either a boost to your weekly entitlement or a lump sum payment.

6 – Consider ways to boost your pension if you need to. With retirement nearing, the scope for making major adjustments to your likely retirement income is limited. But there are still things you can do if you want to make the most of the time that remains before you retire. Two key ways of boosting your pension are to pay more into it – to take advantage of as much tax relief as possible – or to defer the date you start taking an income.

7 – Don’t take risks with the pension savings you’ve built up. While there’s limited scope to make a guaranteed boost to your pension savings in the months before retirement, there are potential risks to the value of your savings to be aware of. In general, in the years leading up to retirement you should already have made sure that the way your pension is invested changed, to reduce the weighting of higher-risk assets such as shares. You should check with your pension provider to make sure your pension savings are invested appropriately.

8 – Clear your debts. You should normally try to start your retirement as free of debt as possible. Your income is likely to go down, so any fixed repayments will start to take up a bigger share of it. Many people use their pension tax-free cash lump sum to clear as many debts as possible. However, in many defined-benefit (salary-related) pension schemes, taking a lump-sum payment can be expensive in terms of the amount of pension income you must give up in return – in these cases it might be better value not to take the lump sum and to prioritise repaying your debts out of the higher pension income.

9 – Be ready for changes in your day-to-day budgeting. You’ll probably need to get used to a different pattern of income and spending when you retire. You’re likely to have less money to live on. Work-related costs will fall, and you may have paid off many of your debts. But your spending may go up in other areas, such as leisure, healthcare and, if you’ll be at home more, things like heating. To prepare yourself for these changes, it’s a good idea to draw up a budget – a record of where your income comes from and how you spend it – and to think ahead to how it might change in the years ahead.

10 – Seek professional advice. The whole area of pension income options and choices is complex. Making mistakes with your own pension arrangements can turn out to be very costly in the long term and life-changing in unwelcome ways. Seeking reliable independent advice should be an early move in your pre-retirement planning.


Please do not hesitate to give us a call or send an email – 01737 225665 or advice@conceptfp.com

Sources: www.moneyadviceservice.org.uk


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Government launch date for 120% drawdown limit …

The new drawdown limit of 120% will be introduced from 26 March, the government has revealed.

Chancellor George Osborne announced plans to return the limit for capped drawdown to 120% of  GAD (the Government Actuary’s Department) rate in his Autumn Statement in December 2012, but gave no date for the change.

In April 2011 the government changed the drawdown limit from 120% of the GAD rate, reducing it to 100%.

Prior to this, individuals could take 120% of the income level set by GAD. This was reduced to 100% in order to prevent investors from depleting their savings too quickly.

The move to reinstate the 20% uplift at the end of last year followed growing pressure from pension providers and MPs, who received complaints from retirees hit by cuts of up to 50% in their income as the GAD rate tracked annuity rates downward.

How providers are going to facilitate this change we are unsure at the moment, although welcome for retirees in drawdown they still have to wait until March.


For further information please do not hesitate to contact us on 01737 225665 or advice@conceptfp.com


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Source: Citywire NMA Alex Steger

Shortlisted – Good Advice Awards – Best Retirement Adviser 2011

We’re delighted to share with you today’s news that Concept Financial Planning has been shortlisted for the Moneyfacts Group Good Advice Award in the Best Retirement Adviser category.

Managing Director, Paul Richardson, commented “we’re delighted to be shortlisted for this prestigious award for the second successive year, and believes it highlights our cdedication to truly holistic Financial Planning, in an area so important to our clients it shows our committment in retirement planning strategies for many of our clients, and guiding through the maze of options they face”.

The shortlisted firms have been invited to an awards ceremony on 23rd September, where the winner will be announced.

Thank you

The Concept Team

Pensioner Poverty?

Against a background of political wrangling about pension reform, a growing number of UK individuals face an uncertain – and uncomfortable – retirement.

According to a survey conducted by Prudential, 35% of UK individuals who plan to retire in 2011 will have an income below the poverty line. The Joseph Roundtree Foundation estimates a single UK individual needs at least £14,000 a year to live; however, 35% of people aiming to retire in 2011 will have an income below this level.

Meanwhile 19% will retire on a meagre income of less than £10,000 a year. Women appear more likely to find themselves in straitened circumstances: 40% of women will find themselves below the poverty line, compared with 30% of men, while 26% of women will retire with less than £10,000 a year, compared with only 12% of men.

Unsurprisingly, relatively low earners are more likely to struggle with poverty in retirement, as they are less able to build up a nest egg to augment the state pension. The Office for National Statistics (ONS) says only 27% of women and 16% of men in full-time employment and earning less than £300 per week are in a pension scheme.

The ONS also warned that membership of private sector pension schemes has fallen. In 2010, 39% of male employees and 28% of female employees were in a private sector pension scheme, compared with 52% and 37% in 1997. However, participation by public sector employees remained unchanged for men over the same period, and actually increased for women.

A study undertaken by the Institute for Fiscal Studies found that pensioners – particularly pensioners who depend on state benefits – experience higher rates of inflation than non-pensioners. Rising costs for food and fuel are putting pensioners under pressure – meanwhile, an environment of low interest rates is squeezing many older people, who are more likely to be savers than borrowers.

The government has proposed a flat-rate pension of approximately £140 a week, to be paid to all pensioners; however, this has yet to be introduced and will not benefit those already in retirement. Meanwhile, according to a survey carried out by YouGov for the National Association of Pension Funds, approximately three million people aim to finance their eventual retirement with a lottery win. However, rather than gambling on your future, it is important to consider how you intend to finance your retirement as early as possible.

Take a look at our retirement guide here

Or if you are looking to maximise your retirement income – take a look at our guide for your retirement options here

People do not grow old like they used to ……

People are rejecting traditional ideas about retirement and want payback from a lifetime of hard work.

 Currently in the UK the 50+ or baby boomer generation, are 20 million strong, accounts for 80% of the nation’s wealth, and are charging towards retirement. Attitudes have changed and retirement is no longer the end destination but a continuation of the life journey. Most people hope that their retirement will be a time they can enjoy and maintain their current lifestyle.

A client I spoke to last week said “I was 60 last month and when my dad was 60 and my mum was 60 they were old people and I really only think of myself as 40. They were thinking of coming to the end of their life but I have no intention of thinking this way”.  However, life expectancy is increasing, and currently a 65 year old man can expect to live until 86, and a woman 88.

 When asked, 56% of baby-boomers said they are not confident about having enough money in retirement. There are two challenges when investing for your pension, which is longevity and inflation. It is the emotional risk attached to losing money that stops people investing.  In order to grow a pension to maintain a desired standard of living, investing funds in cash can not be a long term strategy. Increased longevity combined with inflation could cut a retirees spending power by up to 40% over 25 years. So what are your options? Do nothing? The bank? Property? The stock market? Something else?

With the challenges the credit crunch has presented a strategy is needed to help you protect, repair, and recuperate your pension. Market cycles show it will recover but no one knows when and to what level. Whatever you decide, you cannot afford to do nothing.  Retirement planning may be painful at the time, but it is not as painful as reaching retirement with inadequate provision and having to give up things you have taken for granted during your working life.