I read an article in the Daily Telegraph recently that really pleased me. It basically affirmed the way we sequence retirement income and told the world it can save you thousands of pounds.
In fact, it went so far as to put a figure on how much better off you can be by following our advice, to the tune of 14%.
Savings before pension
The article was reporting research conducted by investment management company, Vanguard. It found that drawing on your savings, before dipping into a pension, can leave you with an income 14% higher than you would receive if you were to draw down on your pension pots immediately after leaving work.
Fortunately for our clients, we figured this out long ago and always advise them to follow a similar strategy.
The theory is, leaving pensions untouched for as long as possible allows them to keep growing and is more tax efficient, as they are exempt from dividend, capital gains and income taxes. Likewise, ISAs should be one of the last sources of income you draw from, as they receive similar tax breaks.
Vanguard’s researchers found that taking a retirement income from a pot of £80,000, split equally between a general investment account and an ISA, would save £18,183 over 25 years, if you drew on the GIA first. This assumes market returns of 5% and with less lost in tax, the higher returns can be reinvested and grown.
Planning retirement
The problem facing most retirees is how to make your savings last, without accepting a reduced quality of life, assuming you are going to live a long and active retirement.
There are now strict limits on how much you can save in a pension before you are hit with penal tax rates (£1.07 million), adding another layer of complexity to retirement planning.
Those who attempt a DIY strategy are often tempted to draw on their pension immediately, or take advantage of the 25% tax-free lump sum to pay off mortgages, etc. But as this research demonstrates, that can be false economy.
By seeking professional advice before making any life-changing decisions, we can predict how the decisions you take now will impact on your income long term and plot how to use your savings and investments to give you financial peace of mind.
We work with you to understand your circumstances, your liabilities and your hopes for the future and construct a plan that allows you to extract the best possible income from the assets you have accrued during your working life. We believe that, by following the strategy discussed here, you can afford to pay yourself more, or even retire earlier.
To discuss the best way to sequence your retirement income, simply contact me on (01246) 298181 or email: david.bashforth@belmayne-ifa.com
