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How can you strike a balance between retiring when you want to, receiving the income you need and not paying more tax than you have to? Peter Watters spoke to McPhersons Financial Solutions to find out more.

Drawdown could be an answer. mcphersons financial

What is drawdown?

For those currently aged 55 and over, drawdown is one of the main alternatives to an annuity. If you don’t need all of your pension to provide a secure income immediately, you can use drawdown to keep your pension invested while drawing an income as and when you want to. There is no maximum limit to the income you can withdraw; which you can stop, start or change at any time to meet your needs.  You also have the option to buy an annuity at any point in the future if you wish to.

It is the flexibility of drawdown which makes it appealing.

It offers the potential to increase your pension value through investment growth and the chance to protect your income from inflation. Your loved ones can also continue to withdraw the remaining pension after you die, as an income, or alternatively as a lump sum, and tax free in many cases.

The amount you draw down should depend on how your investments perform and how long you would like your pension to last. Drawdown is higher risk than an annuity; there are no guarantees and your income is not secure. If your investments perform poorly, you withdraw income too quickly or you live longer than expected, you could run out of money.

The tax advantage

The main tax advantage of drawdown is when you don’t need to use all of your pension pot to provide an income. There is no requirement to use your entire pension fund in one go or to draw it at its earliest point.

Partial, or phased, drawdown can be used to maximise this tax advantage; which simply means splitting your pension into parts and converting each part to drawdown at different times, as and when you need the income.

Each time you convert a part of your pension to drawdown you can usually take up to 25% of that amount as a tax-free lump sum up front.

For those who don’t need immediate income, it is possible to just withdraw the tax-free cash for the time being and leave the rest invested to provide a taxable income later on.

This is a strategy favoured by many who are already using drawdown. These investors have taken their tax-free cash and are keeping their pension fund invested for future growth.

You may wish to use this tax-free cash to add to other sources of income. This could be particularly useful if you reduce your working hours or perhaps take on part-time work during retirement. The tax-free cash can supplement your earnings, without increasing the tax you pay.

For example, if you earn £11,000 a year, and you move £30,000 of your pension into drawdown, you could take up to £7,500 (25%) as a tax-free lump sum up front; boosting your annual ‘income’ for that tax year to £18,500. Assuming you receive no other taxable income in that same tax year, the whole £18,500 would be tax free. The £22,500 remaining in drawdown could be left invested to draw a taxable income from in later tax years.

You can move more money into drawdown as many times as you like, until you have exhausted the tax-free cash part of your pension. You could repeat this process while you transition into full retirement, replacing any reduction in your earnings with tax free cash or taxable income from your pension.

It’s important to remember tax rules can change and benefits depend on individual circumstances.

Please get in touch now to arrange your free meeting on 01424 730000 or info@mcphersonsfs.co.uk. 

What you do with your pension is an important decision. Therefore, we strongly recommend you understand your options and check your chosen option is suitable for your circumstances: take appropriate advice or guidance if you are at all unsure.The government’s Pension Wise service can help. Pension Wise provides free impartial guidance on your retirement options.

 

 

 

Every month, Peter Watters, ACA, shares some useful financial tips especially for Business in Hastings readers. This month, he looks at investments. Which is the right investment vehicle for you to consider?mcphersons-logo

As each has its own features, choosing the one – or even two or three – that’s right for you could bring additional benefits to your investment strategy.  

SHARES 

If you invest directly in shares you are holding a small part of a company and will benefit financially if it is successful, through an increase in the share price or by dividends.

Shares are purchased through a stockbroker or an online share dealing service and charge around £10 plus stamp duty of 0.5 per cent of your investment. However, shares listed on the Alternative Investment Market (AIM) are free of stamp duty from 6 April 2014.

Advantages

• You can choose which company shares to buy.

• As a shareholder you usually have the opportunity to vote on some company decisions.

Disadvantages

• Lack of diversity – unless you hold a portfolio of shares your investment is concentrated in one company.

• Dealing charges can make this an expensive way to invest if you are a small investor.

INVESTMENT FUNDS 

Funds such as unit trusts and Open-Ended Investment Companies (OEICs) are collective investments which allow investors to pool their money together to create a large fund that invests across a range of different shares and/or other assets such as bonds or property. This is run by a professional manager in line with the fund’s objectives.

You buy units with minimum investments as low as £500 or £25 a month, and there are no restrictions on when you sell. Charges vary depending on the type of fund, but are typically an initial charge of up to 5 per cent with an Annual Management Charge (AMC) of up to 1.5 per cent.

Advantages

• Instant diversification without a large upfront investment by you

• Investment decisions are taken by an experienced financial adviser

• Thousands of funds to choose from investing in equities, bonds and property as well as other types of assets

Disadvantages

• Management charges can be high.

• The manager doesn’t always get it right.

INVESTMENT TRUSTS 

An investment trust is a form of collective investment, you buy shares in a company, which then uses the money raised to invest in a range of assets on your behalf.  There are some key differences between trusts and funds. Trusts are more sophisticated, and therefore slightly riskier,

investment than funds. Investment trusts are able to borrow money, known as gearing, which can help to increase profits but can also magnify any losses in a falling market.

Additionally they are closed-end. This means that a finite number of shares are available, so the share price will be affected by supply and demand as well as the value of the underlying assets. This means the shares can trade at a discount or a premium to the net asset value.

Advantages

• Instant diversification without a large investment.

• Gearing means gains can be magnified, although the same also applies to losses.

• Normally lower annual management charge than an equivalent fund.

• Returns can be enhanced if you buy on a discount and it narrows as the trust becomes more popular.

Disadvantages

• Dealing charges can make this expensive for a smaller investor.

• More sophisticated and potentially more risky investment than a fund.

PENSION FUNDS 

A pension fund operates exactly the same as a fund, a manager investing according to the fund’s objectives, but because it is a wrapper specifically for pension investments, there are some important tax advantages. Subject to earnings and the annual “lifetime pension allowance”, anything paid into a pension fund receives tax relief at the basic rate, effectively topping up an £80 contribution to £100. Higher-rate taxpayers receive tax relief at their highest marginal rate. Additionally, although you cannot reclaim the 10 per cent tax credit on dividends, all income and gains in the fund are tax-free. However when you come to take benefits, either as an annuity or when drawing income from a personal pension, these are subject to income tax.

Advantages

• Instant diversification.

• Tax breaks.

Disadvantages

• Money cannot be accessed before age 55.

VENTURE CAPITAL TRUSTS 

A venture capital trust (VCT) is a trust which invests in fledgling companies that are looking to develop their business. The nature of these companies means that this is a higher risk investment.

Due to the risk there are a number of tax incentives to encourage investment. These include tax-free income, dividends and gains and an income tax rebate of 30% of your initial investment into new VCT shares, providing you have paid sufficient income tax that year and you hold the shares for at least five years.

Advantages

• Generous tax breaks.

• Opportunity to invest in very small companies.

• Income payouts make them very attractive for retired investors.

Disadvantages

• Higher risk and more suited to sophisticated investors.

The value of your investment and the income from it can go down as well as up and you may not get back the original amount invested. Past performance is not a reliable indicator for future results. Please contact us for further information or if you are in any doubt as to the suitability of an investment.

The value of your investment and the income from it can go down as well as up and you may not get back the original amount invested. Past performance is not a reliable indicator for future results. Please contact us for further information or if you are in any doubt as to the suitability of an investment.