Pension prep: 5 things to do in drawdown (when you retire)
20 Nov, 2020
It’s here. Finally you have thrown off the shackles of corporate life, ditched the 9-to-5, or hung up your tools. The problem is you’ve also let go of your steady income, and whatever you’ve saved needs to last you the rest of your life. So what should you think about in drawdown, when you start to withdraw your savings?
1. Cash flow analysis
You can do this with an adviser, or there are tools available online. You need to check where your money goes and also plan for how you may spend in future. In retirement, your cash flow needs are unlikely to remain the same over time. In the early years of retirement, you may want to travel and have adventures. In later years, you may calm down a little and settle into more of a bridge and gardening sort of routine. Later on, there may be some care costs, so your cash needs may follow a U-shaped pattern. Either way, if you have a plan, you can use your pension pot in the right way.
2. Set your investment strategy and monitor it regularly
Make sure you have enough guaranteed income for the day to day. For some, the state pension will be enough to cover bills such as utilities, running a car, broadband and so on. However, if you need more than that – if you still have a mortgage, for example, or other residual debt - you should ensure the guaranteed bit of your income (usually an annuity) will cover it.
For the rest of your portfolio, you will need to set your investment strategy. You will need to have a blend of income-producing stock market investments, plus some bonds and property. Again, don't take chances on this. Either take advice, or follow the guidance on your investment platform. This is not the time to start considering a dabble in Mongolian coal mines.
3. Make sure you take your tax-free lump sum
You are entitled to take 25% of your pension pot as a tax-free lump sum. Any income you take over and above this amount is taxable as income. Even if you don’t need the cash, it's worth taking it to supplement your income. It could also act as a cash buffer to help you manage difficult periods in markets.
4. Have a plan B
Retirement is scary. Your cash has to last you the rest of your life and 90% of the time, it will. However, it is worth considering a plan B just in case of, say, a pandemic or another disaster. This plan B might be an option to rent out your main home for a year to defer taking a pension or taking part time work. You probably won’t need to do it, but it can ease the psychological burden of retirement to know there are other options.
5. Check your IHT status
If you stay in a drawdown portfolio, whatever is left when you die can be passed to your heirs in a tax efficient way. If you die before the age of 75 you pay no income tax on withdrawals made by your beneficiaries. After 75, withdrawals are taxed at the beneficiaries’ rate of income tax. This is valuable. Your pension pot sits outside your estate and isn't covered by the terms of your will, so make sure you set out your beneficiaries clearly.
Q&A with pension experts
Questions from Pension Planner tribe members in your age group
Michelle, 55, asks... I have multiple pensions with different providers - should I combine them?
Jan, 57, and Ian, 63, ask... Is it worth us investing around 10% of our cash pension pot when we're already semi-retired?
Tell me more about... drawing from my pension
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