Back in April 1998 – I was a bit younger! Weren’t we all? Apart from that, I set up (so I’m told) the UK’s first ever ‘pension drawdown’ plan via insurer Skandia Life. This is where, instead of buying a guaranteed income for life (annuity) with your pension fund, you withdraw (drawdown) the funds direct from your pension pot(s).
Newer pension ‘drawdown’ since April 2015 is now called flexi-access drawdown. That method of delivering retirement income may (or may not) be a good idea – depending on your attitude to risk, overall income needs and other criteria.
The benefit of 22 years’ experience in advising in this area, is being able to recognise where pension ‘drawdown’ can (and often does) go wrong. Avoiding the common mistakes below gives our clients the best chance of retirement success.
After all, there are only ever 2 outcomes with retirement income – the money outlives you – or you outlive the money (and there is no dignity in the latter). Risk gets real!
If you’d prefer your money to outlive you rather than run out– feel free to drop me a line at email@example.com or call 01312262012 for a chat.
The Top 5 flexi-access pension income drawdown mistakes:
1. The wrong fund(s) and asset allocation – there may be trouble ahead! With profits and smoothed funds won’t work for flexi-access drawdown. Nor will pension plans with product exit fee (SJP come to mind). Single managed fund solutions stop you from temporarily targeting, for example, bonds for income in a downturn.
2. The wrong pension plan / pension plan structure – your pension lacking the right features may cost you and your family dear. Not all providers moved with the times when the pension rules changed in April 2015. Remaining with your current provider when you move from accumulation (saving) to decumulation (spending) is rarely the best solution. Then again, don’t pay too much to move your old pension plans to the newer style. We at Wishart Wealth Management are happy to work to a fixed fee for this important stuff.
3. Paying unnecessary income tax – why not drip-feed cash (‘PCLS’) monthly versus taking all the 25% cash at once? Keep ‘income’ below or within certain tax thresholds. Have a plan.
4. Too much, too soon – beware sequential risk – the danger that the timing of withdrawals from your pension pot will damage your overall return (especially in a down market). Safer to create a sustainable income plan first and stick to it. I find that Timeline App software we use works better than cashflow software for creating this type of plan.
5. No fire-drill or ‘Plan B/C’ – it is wise to practice and agree a plan of action in advance of the inevitable investment value downturns (‘bear markets’. Key ‘fire-drill’ spending strategies include Guyton’s Guardrails, Floor and Ceiling Rule and Kitces’s Ratcheting Rule – yet how many pension investors (or their advisers) really know (or can explain the use of) these options for making your money last your lifetime?
The above list is not exhaustive. By having a proper plan and avoiding these mistakes – you can make your money last a lifetime and perhaps beyond.
Starting to take an income from your assets once you stop or reduce work represents a seismic life change – and also a change in risk. Risk is quantifiable. This is not an area we recommend self-advising in. Seek expert help (with what might well be your largest asset of all).
I’m happy to chat and answer any queries you have regarding your pensions. The retirement income journey should always start with having a plan. We love helping clients plan. Life is no dress rehearsal.
This article does not constitute personal advice. If you are unsure as to any course of action, please talk to us on 0131 226 2012 or email us your queries at firstname.lastname@example.org – an initial consultation is always without charge.
Author Iain Wishart is a Chartered Financial Planner, Chartered Wealth Manager™, Certified Financial Planner© professional and Kinder Registered Life Planner©.
The value of your investment can go down as well as up, and you can get back less than you originally invested.
Past performance or any yields quoted should not be considered reliable indicators of future returns. Whole of market independent financial advice can be provided as part of other services offered by Wishart Wealth Management Ltd upon request and on a fee basis. Prevailing tax rates and relief are dependent on your individual circumstances and are subject to change.