The Best Income Strategy Part 2

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Continuing from the previous blog entry about the best income strategy, we start explaining the WRAP platform.


How should you consolidate your pensions? We have managed our clients’ money for the last 15 years through what is now known as a WRAP platform.

The advantage is that a client’s investable money is all in the same place. Furthermore, you can decide on an investment approach and then apply it to all of the different tax wrappers in order to simplify matters. You can log in online and see your portfolio in the same way as you can with online banking and you can monitor your investment returns and clarify for yourself how to draw the income to minimise the tax you pay. You can also perform one vital action on your portfolio that is nearly impossible to achieve when you have multiple accounts: ‘Rebalancing’.

Rebalance For Safety

Rebalancing refers to regularly resetting a portfolio to the original design to avoid this potential problem. In effect, you are locking in the gains from the higher-risk assets in order to protect them when the bad times come. An even better way is to use a technique called ‘Trigger Rebalancing’.

Similar in every way to conventional rebalancing except the timing, ‘Trigger Rebalancing’ has you rebalance at optimum times rather than at random times throughout the year. You can set trigger levels for each asset class so that when that trigger is breached, the portfolio is rebalanced. The result is a further increase in the returns of the portfolio over time above that of traditional rebalancing.

Financial Planning Versus Financial Advice

For me, the difference between ‘financial planning’ and ‘financial advice’ is that the former is done by people that understand your needs and take time to understand a client’s beliefs, future

ambitions, time frames and goals, to be able to build them a proper financial plan. Only once this is done can the most appropriate investment or retirement recommendations be made. By really getting to the core of what is important to a client, you can deliver much better financial recommendations as a result of building a detailed financial plan.

Choices At And In Retirement

Nowadays, you have many options to prepare for retirement: Options to facilitate what you want for your retirement, to make life more flexible, to give you more control and ultimately to allow you to pay less tax; and to leave your money to whoever you want to.

In summary, as we have already discussed, you can take 25% of your pension as a tax-free lump sum, either in one go or gradually. With the remaining funds, your options are effectively:

1.) Purchase a lifelong income in a variety of different forms.
2.) Purchase an income for a fixed period.
3.) Leave the money invested.
4.) Leave the money invested and draw a taxable income through drawdown, which means you can increase, decrease, stop or restart it when you want.
5.) Take the rest as a taxed lump sum (55%) in one go or gradually.

Points four and five became available through ‘Pensions Freedom’. All of these options have different tax implications, which should play a key role in helping you make the decision that is right for you.

You are able to take 25% (or similar for Final Salary Pension Schemes) as a tax-free lump sum. Regardless of what you do with the taxfree lump sum, this leaves you with around 75% of the pension to decide what to do with.

Annuity Purchase

iStock_000014132824_MediumThe traditional option is that you can give all of your hard-earned savings away to either a life insurance company or a previous employer in exchange for a guaranteed income for life.

Of course, the problem with this route is that your income is then set for the rest of your life. You cannot increase, decrease, stop or restart it. Also, once you (and your spouse, if you included an income for them) have died, then that’s the end of it. This is the gamble of the annuity: Not knowing how long you are going to live!

Income Drawdown

You can leave the remaining 75% inside your pension and draw out the income as lumps or as income as you see fit. The downside of this approach is that if you draw it out too fast, you might run out. Similarly, if the investment returns are poor, the same might happen.

You can increase, decrease, stop and restart your income, and what’s left over you can leave to those that you love.

You do need to ensure that you get your money into an environment that can facilitate drawdown, since many older or more basic pensions cannot, including many company pension schemes. This also could change in the future, of course!

It is imperative that you regularly review your pension funds if you decide that this is the approach for you. By doing this, you will be able to see future problems much earlier and be able to make arrangements to address them.

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