The Best Income Strategy Part 3

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To wrap up, we will discuss what made pensions cool in 2014 and a few more strategies to achieve financial freedom in retirement.

Pensions Became Cool In 2014

In April 2014, pensions suddenly became cool because of ‘Pensions Freedom’. Pensions became cooler on 3rd December 2014 because the 55% death tax in pensions would be scrapped.

Firstly let’s focus on ‘Pension Freedom’, which allows a pensioner to take his or her entire pension in one go. George Osborne, the emancipator of the pension pot, has given retirees the freedom to choose what they do with their pensions.

Before you get too excited about this prospect, note that the downside of taking all of your pension in one go is that you will pay Income Tax on this money at your marginal rate.

What about the long-term prospects of what happens to the money at your death? This brings us nicely to the removal of the 55% tax charge. Without this tax, the pension has become a really powerful estate planning tool. Money left in your pension will pass to your beneficiaries completely free of Inheritance Tax if you die before the age of 75. If you die after the age of 75, it will be taxed at the recipient’s marginal rate.

Another consideration is that not only is the pension growing in an environment that is protected from taxes; potentially it could also be protected from long-term care fees too. Only time will tell whether this is the case, but this has certainly presented some interesting planning opportunities that could significantly increase your family’s wealth. It will probably make sense to generate as much income from your other assets first to preserve the pension as long as possible in order to maximise what you leave behind to your loved ones.

Minimise Tax, Maximise Income

Whilst taking the whole lot may have initially sounded appealing, you can see it isn’t actually that appealing in reality. Early in retirement, buying into an annuity may not be the best approach

unless you only have the absolute minimum for the rest of your life or you aren’t willing to take any investment risks at all. However, it may become an attractive option later in retirement when your income and expenditure have balanced out and you have settled down.

Using drawdown allows you to manage your tax much more effectively, and when combined with drawing an income from NISAs and other investments, you have the opportunity to pay little or no tax for a number of years, or even at all!

The best strategy in our first year of retirement may well be the wrong strategy in year two, three or four. The key is to remain flexible and to manage your income to minimise tax, either by yourself or through sound professional advice.

Downsize Versus Equity Release

Equity release is a useful tool for those in retirement, but it can also be a disastrous decision if made at the wrong time. Equity release is effectively a lifetime mortgage, but instead of paying the interest it gets rolled up with the loan.

Historically this area was unregulated, and caused many people a lot of heartache and financial distress. Fortunately it is now a regulated market, which has improved matters significantly. There are two main types, and www.Which.co.uk sums them up best:

Lifetime Mortgages

Home Reversion Schemes
Source: www.which.co.uk/money/retirement/guides/equity-release-explained/equityrelease-schemes

Whether this is right for you will depend on your situation, but I urge you to be cautious if you are considering doing this. Downsizing will almost certainly be a better financial decision if it is realistic for your lifestyle, but this isn’t always going to be possible. If it’s not, equity release should be one of the last ports of call. Ensure that you have used up most of your investments and pensions before you consider it. Make sure to discuss this with your loved ones so there isn’t a nasty shock and a potential family fallout further down the line!

Staying In Financial Freedom!

It is worth mentioning here that when it comes to accessing your investment returns, bear in mind that a portfolio may be designed to give you 6% growth per year over the long term, but it is unlikely it will actually give you 6% in any one year. Remember that reducing the level of investment risk after retirement also makes sense since you are starting to be affected by ‘Pound Cost Ravaging’.

Starting and revising a budget will give you much greater clarity in retirement and a better understanding of whether you are over- or under-spending. Your time, financially speaking, has now arrived. By following these steps you should reach your ‘Financial Freedom’ and create enough wealth to never have to work again for the rest of your life— if that’s what you want to do.


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