Can a pension pot keep growing after I start drawing it?


25-02-2020
Two people counting coins_ photo shows their hands only

Sarah Austin, Independent Financial Adviser from Martin-Redman Partners writes about pension pots, further to a question recently asked by a client who was seeking advice on how best to take income from their pensions.

The short answer is ‘yes’ if you choose the flexible pension drawdown route. Another choice you have is buying a guaranteed income, known as an Annuity in which you sell your pension pot to an Annuity Provider, in return for a guaranteed regular income for life. This option means your pension pot is no longer invested.

How pension drawdown works

If you choose pension drawdown, you can take all of your tax-free lump sum (25% of your pension pot) from the age of 55 with the remaining 75% (which is taxable read more here) invested into funds designed to provide you with a regular income. Good investment returns and a relatively low level of income taken will mean that your pension pot will grow in value over time.

If you are using “phased retirement”, (taking a mixture of tax-free cash and taxed income over time), there is a possibility that your tax-free cash value will also rise over time, meaning a greater tax-free cash lump sum could be available later.

The risks of pension drawdown

Unfortunately, just as the positive outcomes outlined above are possible, poor investment returns and drawing a high level of income could drain your pension pot too quickly meaning you could run out of income in your lifetime.

To manage this risk most Independent Financial Advisers will explain the concept of a ‘Safe drawdown rate’. This is a sustainable level of income, drawn to last your lifetime. The rate depends on the pension investment portfolio returns, your attitude to investment risk, inflation and your likely life expectancy.  

Safe drawdown rates

There have been many studies on safe drawdown rates; at Martin-Redman Partners we work as a starting point with 4 per cent. If you had a pension pot of £100,000 for example, a safe drawdown rate could be £4,000 per year.

This article by Money Observer highlights that many retirees are drawing income too quickly. The average level of pension income being drawdown, as reported by the pension provider AEGON is 5.2 per cent and by AJ Bell 10 per cent. This suggests that the individuals are at risk of running out of pension funds in their lifetime (and are unlikely to be taking financial advice on a sustainable income). Typically, a UK-based IFA will plan that the client will live to the age of 99, so their income will not run out during a lifetime.

There are several assumptions involved in calculating a safe drawdown rate, a key one being that the pension pot is invested in a diversified mix of assets on a “balanced” basis, with a mix of equity assets, government and corporate bonds, cash and cash equivalent assets, so just putting the pension pot in the bank as a cash deposit will not work in the long term. The elephant in the room is inflation, as this will drag down the value of cash assets in the long term and undermine the value of the income you receive in later years.

In summary; pension drawdown provides a more flexible pension income, which can be increased or decreased each year, and remains invested. An annuity will provide a guaranteed income, but no longer means your pension is invested with the possibility of benefiting from growth. If you would like to read more on pension drawdown the Money Advice Service has a clear, easy to read article here.

 

How do I get independent pension advice on pensions and retirement planning?

Pension planning and working out which income option is best for you can seem a complex area. We provide independent financial advice in this area.

Please contact us at info@martin-redmanpartners.co.uk or call us on 01223 792 196 to arrange an initial appointment, at our expenses, with one of our Independent Financial Advisers. 

 

About Martin-Redman Partners  

We are a team of experienced Independent Financial Advisers (IFAs) who can advise on your personal or business financial arrangements. We have been building trusted relationships with clients for many years by articulating clear and tailored recommendations in areas ranging from investments to retirement planning, to complex estate planning advice. 

We offer expert independent financial advice throughout Cambridgeshire, Leicestershire, Suffolk, East Anglia and the South East.  Many of our clients are within, or are in the surrounding areas of Cambridge, Grantham, Stamford, Bury St Edmunds, Frinton on Sea, Ely, Peterborough, Huntingdon, Cambourne, Newmarket, Soham and Oundle.

The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly, no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction. 

 

We provide independent financial advice on investments, pensions, inheritance tax planning and protection. We work with private individuals, businesses and professional introducers, such as accountants and solicitors, to ensure our clients financial advice needs are met.

Martin-Redman Partners