Retirement Income  

A mix 'n' match retirement

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Blended retirement income options: Cottoning on to the 'new norm'

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Investment bonds also allow income to be taken without increasing the client’s immediate income tax bill. Withdrawals from other investments are likely to be taxed. However, it might be preferable to taking pension income for two reasons:

•    It might be possible to reduce risk exposure by cashing in higher risk assets such as direct equity investments.

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•    Unlike pensions, these investments would be included in the estate in the event of the owner’s death.

Investing in property is a valid alternative strategy to market-based investments, particularly if it is income generating as a result of a third party let. The downside is, however, that the property could be difficult to rent and/or sell, which is a particular drawback for those intending to use the value of their own residence.

 

Income level

Options at retirement

Property

  • Income generated from rental payments or by selling property (and investing in income-producing assets)
  • Sales price dependent on market and condition of property
  • No age restrictions on access
  • Income may be dependent on tenancy
  • Can be hard to sell property in difficult markets

Lifetime Iis (Lisa)

  • Fund value based on amounts invested and returns
  • Income unlimited up to fund value at access/retirement
  • Income exempt from income tax providing conditions met
  • May be used to provide retirement income from age 60 without penalty
  • Income can be withdrawn early subject to a 25% charge

 

Other Isa

  • Fund value based on amounts invested and returns
  • Income unlimited up to fund value at access/retirement
  • Income exempt from income tax providing conditions met
  • No age restrictions on access, subject to term money left invested

Direct equities

  • Fund value based on amounts invested and returns
  • Income often based on natural yield of portfolio
  • Additional income can be achieved by encashment of funds
  • No age restrictions on access

Bond

  • Income based on value of initial investment and market returns
  • Income tax may be deferred on withdrawals of up to 5%
  • No age restrictions on access

Building society/bank account

  • Income often based on, although not limited to, interest or dividend income
  • Returns based on interest rates or performance of underlying assets
  • No age restrictions on access, although minimum investment term could apply

Whatever the income source, or more likely mix of sources, most retirees will require it to last for a considerable time and the longer it needs to last, the lower the amount that can be safely withdrawn in each year. It is essential that income sustainability, incorporating all income sources, is regularly monitored and if it looks likely that it will run out, action should be taken. The most obvious option here would be to reduce the level of ongoing income. However, another option might be to delay retirement.

Most pensions will be increased if they are taken later, including the state pension, which offers generous terms for those likely to have better than average longevity. Unfortunately, the individuals who are most likely to need to work longer are the least likely to be able to, since those with higher earnings and greater savings are also likely to be in the best health. That is why private savings are essential – they make working longer a choice, not a necessity.

Fiona Tait is technical director of Intelligent Pensions

Key points

Pensions are the only option specifically designed to provide long-term income in later life.

There are combination products that offer an annuity underpin and drawdown facility within the same plan.

Investment bonds allow income to be taken without increasing the client’s immediate income tax bill.

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