Options at retirement

When you decide to retire, and this may be in a one-off action or over a period of time as you wind down your time at work, you will need to make some decisions relatively quickly.

It is important to remember that some of these decisions cannot be reversed so make sure that, where necessary, you get advice on the best course of action.

If you have not already done so, now is going to be a good time to undertake some form of cash flow planning as this will give a clearer picture of how much you can afford to spend and when. Don’t forget to make allowances for the potential costs of later life care when undertaking this type of planning.

Many individuals tend to under-estimate how long they are likely to live and can therefore make some poor decisions based on incorrect judgements.

Being tax efficient

With a finite amount of assets available to cover the cost of what could be the next 20, 30 or even 40 plus years of retirement means that being tax efficient with income and capital withdrawals will help your money go further.

Pensions will offer a level of tax free cash which could be taken in one go or over a period of time. The rest of the pension must be turned into an income but you can often control the level of income to make sure that it does not cause you to pay more tax than you need.

Some will be fortunate enough to get a defined benefit pension from their employer which will offer an income without the concerns of any investment risk as this will be borne by the employer. However these types of pension are becoming rare and therefore many will face the need to decide for themselves how to take an income from their pension.

Purchasing an annuity

When thinking of pension income, this could be taken via the purchase of an annuity which will give you access to a regular stream of income for life. Depending on the type of annuity that you buy this could stay level or rise in value and it could offer an income to your spouse or civil partner should you die before they do. The problem with an annuity is that once you have decided what you want you cannot change your mind. It is often therefore a good idea to firstly take some advice before buying, secondly to shop around using what is known as an ‘open market option’ and thirdly not to buy an annuity with all your pension money at the same time.

Income from investments

A pension can at times allow you to take income directly from the investment. This is much more flexible than an annuity as you can adjust income levels to suit your needs. You are however continuing to take an investment risk if you do this and you would need to be comfortable with continuing to take this risk as you enter retirement.

Hopefully, as well as a pension, you will have other investments. Individual Savings Accounts (ISAs) will allow you to make withdrawals without incurring any tax liability. Other investments will offer the availability of a capital gains tax allowance. This will mean that you can take a level of investment gain each tax year without paying tax on it.

Investment bonds, which will have paid some tax on the investment returns within them, can be paid out to a basic rate taxpayer without further liability. If you can engineer yourself and/or your spouse or civil partner to be a basic rate taxpayer at some stage in your retirement, taking the benefits at that time can be tax efficient. These withdrawals can be staged over a number of years if appropriate.

Why options are important?

As can be seen, if you have given yourself options, you can ensure that capital and income you receive in retirement can be highly tax efficient.

Finally, if you find yourself in the fortunate position of having more money than you need for your retirement years, you may wish to consider undertaking some estate planning. This could simply involve ensuring that you have a Will and that it is up to date or could look at the ability to gift some of your assets either directly to your proposed heirs or into some form of trust.

Estate planning can be very tax efficient but it often needs time to be effective so don’t leave this type of planning too late into your retirement.

Your investments can go up as well as down. You may not get back the amount you invested.

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