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Making Sound Pension Decisions in Uncertain Times

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Everyone was watching when the Brexit vote was taken. No one followed that historic vote more closely, or the after-effects, than people in retirement or those about to retire. Many feared that billions in pension savings would be wiped away in a flash after the vote. Those preparing to retire had a hard time maintaining confidence in their investments while watching interest rates and the rates on annuities plummet to all-time lows.

There are options

One ray of good news is the changes made to pension rules in April 2015. These changes gave retirees more options than they previously enjoyed. Those over 55 now can choose from multiple options when deciding what to do with their savings. These options include taking larger sums in cash, staying invested or rolling savings into buy-to-let.

Some retirees may be a bit intimidated by these newly-found freedoms. Many may have a difficult time deciding what to do with their pension pots. Before deciding how to manage your pension, consider the strategies available to you.

Stay invested

One option, known as “drawdown,” lets retirees draw an income from their pension. This income may be dependent on corporate bonds paying fixed amounts of interest or companies dolling out nice dividends. The retiree takes out the amount needed and leaves the rest invested. The strategy here is to ride out stock market fluctuations and give investments more chances to grow.

Any remaining funds can then be passed along to beneficiaries without fear of inheritance tax.

This strategy does not guarantee your income, however. If your lifespan extends longer than expected or you spend too much, you could run out of money. A severe hit to the stock market would also render a massive hit to your pension fund.

Cashing in

If you are aged 55 or over, cashing in your pension pot is one of your options. Doing this, however, will subject the majority to tax. You’re allowed to take a 25 percent lump sum tax-free, but after that the tax for withdrawing the rest is set at your personal rate.

The smart move here is to think about tax efficiency instead of thinking about a nice lump of cash tax-free. You would be able to do whatever you want with the money, of course, but it won’t be generating income for you. You also put yourself at risk of being bumped into a higher tax bracket with a large withdrawal.

Property investing

Some pensioners who prefer to have assets they can see, such as buy-to-let property. After the mortgage is paid off, the property may be able to generate retirement income. Property is not a tax-efficient retirement investment, however, and many predict that taxes here will grow in the future.

The amount of income generated can be undercut by mortgage costs, letting fees, maintenance and insurance costs, and there may be periods of no income when there are no tenants. Income generated by letting your property is taxable, too. That needs to be a serious consideration if you’re considering this option in these uncertain times.

 

 

Sam

Director & founder of @CustardMedia; an online marketing and SEO agency. As seen in @marketingprofs, @prweek and @smbizceo.

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