Pensions Freedom time is upon us. Sort of. And in this and an accompanying article (https://www.retireeasy.co.uk/news/article/mark%E2%80%99s-top-six-tips-on-pensions-freedoms-%E2%80%93-numbers-one-to-three) Mark Soper offers his six top tips to overcome the barriers and make the most of the opportunities
Top Tip 4 – How will you use the drawdown money?
There may be some very sound reasons why you may wish to draw down some, or even all, of your pension fund in cash. But whatever these are, you must challenge yourself as to whether any immediate benefit outweighs the loss of your future retirement income. After all, once it’s gone it’s gone – and the memories of that dream cruise or open top car will not seem so golden if you run out of cash later in your life.
This may be difficult and you may need to consult an adviser or plot your financial circumstances using a cash flow tool – the perfect one being the RetireEasy LifePlan of course!
If you have plenty of other assets from which you can generate an income, phased drawdown may be an ideal tax-planning tool. Equally, if you are on a low income and carrying a large or expensive debt, it may make sense to pay off the debt with part of the pension fund.
There are so many circumstances which may or may not be best fixed by an income drawdown plan, so if this (or an annuity) don’t appeal, the next couple of tips look at two other options: ISAs and property.
Top Tip 5 – Is using drawdown to purchase an ISA a good idea?
Even though pension drawdown has been around for a long time, before the more attractive pension freedoms hoved into view, most retirees took their maximum tax-free cash lump and used the remaining pension fund to buy an annuity plan. This was because no tax free cash was available once an annuity had been purchased so the cash was taken whether it was needed or not.
A huge amount of this unused cash was re-invested into Cash and Investment ISAs – and this became a fairly standard route for retirees over the last 10 years.
Very recent evidence suggests that individuals are still taking the maximum cash sum – even though it is not needed – and this again is being reinvested immediately into cash and investment ISAs. This may be due to the perception of quicker access to cash under an ISA or a lack of trust in the pension plan provider, or possibly both.
One of the key tenets of the new pension freedoms was the removal of the 55% ‘’death tax’’ on the remaining (crystallised) pension fund after the 25% tax-free lump sum had been withdrawn. Overnight this made the death benefits available from pension funds not only more valuable but also very efficient for Inheritance Tax planning purposes.
And, don’t forget, you can withdraw the 25% tax-free part of your pension fund in stages either in ad-hoc amounts as and when you need some cash or as regular tax-free income.
ISA funds are potentially subject to Inheritance Tax as they cannot be written under Trust and their tax status changes on the death of the investor.
So, if you wish or need to plan for the potential IHT that your family may need to pay on your death, even after the Chancellor has kindly moved the goalposts for you in the last Budget, consider your pension fund as a possible vehicle to mitigate this liability. You should certainly seek independent legal or financial advice when considering such complex planning – especially as potentially large sums are involved, and considerable long term planning may well be required.
Top Tip 6 – Is using drawdown to purchase a Buy-To-Let property a good idea?
BTLs have been extremely popular over the last 20 years – not least due to the potential dual gain of a regular fixed income and an increase in the capital value of the property.
In reality, of course, it doesn’t always work out like this and as we all know property prices and rental income can fall as well as rise and there is always the tenants and lack of rental to consider: a month or two void can really eat into your returns.
However, BTLs can be very tax effective for higher rate tax payers – particularly when a mortgage is in place on the property. However in the emergency Budget, George Osborne announced a restriction in the amount of tax relief available: from April 2017, new rules will be introduced gradually that will ultimately cap the tax relief on the mortgage interest to 20%.
So does that still make it a worthwhile haven for your funds?
Property prices have risen, particularly in London and the South East over the last three years… but will it be sustained?
Some expert commentators have voiced concern of the sustainability of the BTL market in the coming years – which may fuel slower or negative growth in the property market, particularly at the BTL end of the market. Conversely, we are still living in a country where demand for housing is outstripping supply, and where getting onto the housing ladder remains beyond the reach of many.
That in itself should see the rental sector holding its own in terms of income and demand. But there are never any guarantees!
So in determining if this route is right for you it may be better to concentrate on the income such an investment will deliver rather than the dual benefit of both income and a capital return. Yields average around 5% nationally but will vary considerably across the country – with London (which has seen higher capital growth) generating lower returns than areas where property is significantly cheaper.
You will also need to factor in maintenance costs as well as agents fees if you don’t manage the property yourself. Multiple occupancy houses are currently delivering better returns than single occupancy – but they do involve greater management input to ensure the property is well maintained and occupancy rates are maximised.
This article gives you a deeper insight! (https://www.retireeasy.co.uk/news/article/buy-to-let-still-worth-considering-to-fund-retirement)