For all the resilience the UK economy has shown, there is no doubt that this year's ISA season is set against a backdrop of uncertainty. Whatever the pros and cons, Brexit, and a lack of clarity on what our future economic relationship with the EU will look like, has left us at a crossroads.
5 handy pension boosters for your retirement
There is much talk of an ageing UK population, and, with the economy facing challenges and a Government grappling with rising national debt, it’s fair to say that ample support from the State is not something that can be taken for granted in the long-term. Perhaps underlining this, a recent infographic we published demonstrated the pessimism among Brits when it comes to retirement, with 22 per cent of non-retired UK adults believing they will never be in a position to down tools one day.
For those who have either already retired, or are on the brink of doing so, the need to safeguard and enhance your pension pot is as vital as ever, especially in a climate of market volatility and low savings rates.
It’s easier said than done though, as the market in particular continues to confound. The FTSE 100 is predicted to soar to in excess of 9,000 this year by some, while others predict that a rapid decline is not far away. Market responses to various stimuli also seem to defy logic at times. For example, there are growing fears that the much-hyped ‘Trump Trade’ – essentially a mega-expansionary fiscal policy – could be set to unravel. Yet, counterintuitively, stock markets stubbornly shot up in reply.
It underlines the challenges faced by over 55s, who, as of April 2015, are in a position to take control of their pension pots. Tumbling rates on annuities mean many pensioners have turned to income drawdown schemes en masse. These allow you to withdraw regularly from your pot while the rest remains invested.
However, few who enter into income drawdown plans are investment experts. Whether you can afford to recruit a financial adviser to set up and maintain your drawdown scheme or not, it is thus wise to clue yourself up as much as possible so that you can successfully master the destiny of your own retirement fund. Here are five tips to help your cause…
1. Hold off on withdrawals
One of the hazards of income drawdown schemes is ‘pound cost ravaging’, which, when markets are in decline, encompasses a triple threat in which the capital value of your fund falls; further depletion occurs as a result of the income you take out, and also the fact that future income is diminished.
Essentially, it means that you help to crystallise your own losses by drawing down from your plan during market turmoil. It is thus advisable to either cut spending, or temporarily use other cash sources to cover your living costs if you can. You can even set up an income drawdown scheme such that it comprises a cash (i.e. non-invested) component, which you can use up with your initial drawdowns.
2. Flexibility when withdrawing
As stated above, it’s a good idea to cut down on the amount you withdraw when investments are not doing well – to the bare minimum, if possible. Yet even taking a fixed income might not be in your best interest, given that the total value of your fund is a moving target. The rule of thumb is that you should take 4 per cent of your fund per year, so switching to percentage withdrawals may set you onto a safer, more realistic path.
3. Be proactive
We’re strong proponents of diversification when it comes to investing. Yet if you have a good mix of asset classes within your income drawdown portfolio, and some are performing better than others, it may make sense to withdraw from those which are doing well. As a result, your portfolio will be rebalanced towards the original mix of assets, and realign towards those assets which are currently cheap, but likely to recover.
4. Don’t be frightened by market dips!
If you are in it for the long haul, market dips need not concern you too heavily (provided your portfolio is well diversified, of course). In fact, these dips can even present an excellent opportunity to buy cheap and give your retirement savings a boost over time. We must heavily caveat this point – this isn’t for everyone, and you should only seek out these ‘bargain’ stocks in companies which are fundamentally solid. Added to that, we must again underscore the importance of diversified investment, while these should also be viewed as long-term buys, rather than a gamble on a short-term gain. It can resemble a game of catching a falling knife, but, with the right expertise and research, market dips can also work heavily in your favour if you’re prepared to be brave.
5. Don’t completely disregard the annuity
Once you are locked into an annuity, you cannot convert this into an income drawdown scheme. However, the reverse is not true, so if you find that, as time goes on, managing your investments becomes tiresome, you can put some or all of your money into an annuity. There are also hybrid models available, which are essentially drawdown plans with a guaranteed income component. Always check for fees, and bear in mind that exchanging for the certainty of a guaranteed income will always come at a cost. But you may just find it to be more suitable for you.
We would always recommend that, whichever piece(s) of advice you make use of above, you should do so in consultation with a professional adviser. But hopefully this can help you feel optimistic about your retirement, and that, with a bit of savvy management, your best years still lie ahead!
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