| Without wanting to offend the 900,000 or so people born in the UK in 1970, this year you can officially become a “pensioner”.
You may feel young, and world can still see you as such, but hitting 55 gives you a choice for the first time about whether to start tapping into your pension.
Anyone born in the 70s was part of the new “credit card generation”, a buy now, pay later cohort encouraged towards instant gratification, whether it could really be afforded or not.
That came at cost. Whacking what you wanted on your plastic was always followed by a bill landing on the door mat. Often enough, that was also accompanied by a hefty dose of buyers’ remorse.
The option to take as much as a quarter of your pension as a tax-free lump sum from age 55 can seem attractive. And it may be right for you. But it, too, comes at cost.
To coincide with Financial Planning Week, we wanted to talk about three possible scenarios that this year’s “pensioners” may want to think about.
Firstly, let’s look at someone born in 1970, with a pension pot of say £250,000. They will likely have both other assets and liabilities: a mortgage, savings, ISAs. Family responsibilities, perhaps including school fees.
They face challenges, most obviously that £250,000 is unlikely to be enough to retire and enjoy the lifestyle they’d aspire to. With the cost of living steadily rising, they’ll need other income streams.
Against that backdrop, many in this age group have already faced a challenging few years trying to balance the books while continuing to save for the future. And the next 30 years or more are only likely to bring increasing healthcare costs and unpredictable economic conditions.
The good news is pension freedoms offer flexibility. Withdrawals can be tailored to suit individual needs. The opportunity is there to grow a pension pot further by remaining invested for another 10 to 15 years.
Partial pension withdrawals can be made to reduce debt or fund investments, while most of the pot can remain invested for long-term growth.
That allows this first group of 55-year-olds to explore a phased retirement. Continue earning, while tapping into pension savings as needed.
What about those born 10 years earlier, in 1960? They hit the more traditional age for a “pensioner” this year, at 65.
The challenges they face are a little different. With a bigger pot of say £500,000, they will want to balance drawdowns to avoid outliving savings.
They must decide between income security, via an annuity, or flexibility, via drawdowns, all the while managing the risk posed by inflation.
A £500,000 pot might sound substantial, but spreading it over 20 to 30 years requires careful planning.
Pension freedoms allow access to up to 25pc as a tax-free lump sum up front, £125,000 here, with the option to manage the remaining £375,000 flexibly.
At present, a 65-year-old is also only a year off receiving the state pension alongside personal savings for greater income security.
They can buy an annuity for a guaranteed income, married with a flexible drawdown strategy. That could offer long-term investment for growth while drawing a modest income if required to meet current needs.
Finally, some things to think about for those born in 1950, turning 75 this year, with a pension pot of say £1,000,000.
They must manage the mandatory withdrawal of a 25pc tax-free lump, leaving £750,000 to be used strategically, and navigate limits on annual pension contributions.
The good news is their larger pension pot enables greater flexibility and the potential for higher income.
Pension freedoms allow for tailored withdrawal strategies – leaving a legacy, investing further, or enjoying a high standard of living.
Retirees at this stage may be less affected by market downturns, as their primary concern shifts to wealth preservation.
They can create a tax-efficient withdrawal plan to avoid high income tax rates. Remaining funds can be preserved to leave an inheritance or cover care costs. Investments can be explored to ensure returns match inflation rates.
As always, thanks for listening.
Martin |
