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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.

 

 

 

Philip Hammond the new chancellor confirmed in September 2016 that the Help to Buy mortgage guarantee scheme would close at the end of 2016. This decision brought to end three years of Government support for first time buyers. But will it have an impact on your homeownership aspirations?

A successful policy

The scheme was first introduced in October 2013 in an attempt to boost and provide a deposit percentage of lending at high Loan-To-Values (LTVs). This helped first-time buyers get onto the property ladder. Records show that it appears to have had the desired effect: official figures show that the scheme has supported 86,341 purchases since its launch, with 79% of those being to first-time buyers, and has led to a surge in activity in the high-LTV sector with a welcome boost in competition and product choice across the market. Chancellor Philip Hammond decided to write to Mark Carney, Governor of the Bank of England, to say that the scheme would close to new loans at the end of 2016. He said that it had done the job it was intended to do in kick-starting the high-LTV market with the figures demonstrating that the purpose of the scheme “had been successfully achieved”, and that given the average price of a home bought through the scheme stands at £157,000, it’s been shown to support responsible lending.

The strategy

It was always intended to come to an end in 2016, but there had been calls for it to be continued, particularly given events that could create uncertainty in the market. There were fears that lenders could once again retreat on the LTV position which follows lesser deposits without a Government guarantee to act as support, so the decision to wind down the scheme came as a bit of a surprise to some. However, the Chancellor doesn’t see this as a problem. He said in his letter that the high-LTV sector has become “less reliant on the scheme as confidence has returned,” he went on to say that there are now over 30 lenders that offer 90-95% LTV mortgages outside of the scheme. He believes that the closure of the scheme “will be unlikely, in current market conditions, to affect significantly the provision of finance to prospective mortgagors, including high LTV borrowers”.

Boom or bust

Many believe this is the exchequers fiscal ‘drawing in of the horns’ , so which is it – boom or bust? The Chancellor certainly seems to think that the high-LTV sector will continue to flourish without the scheme being there, but critics think he has got it wrong. Much of it could come down to how the mortgage market as a whole reacts to the uncertainty caused by the referendum, but more recent figures show that lenders are already becoming slightly more cautious about lending to those with only a 5% or 10% deposit.

All may not be lost, however, as it’s worth pointing out that the Help to Buy Equity Loan scheme, the phase of the initiative that provides support to buyers in the form of a Government loan, is still going to be available, so first time buyers could still find some help. However, the market here is slightly different: although 81% of the 91,759 properties bought using the equity loan scheme have gone to first time buyers, the scheme is only open to those buying new build homes, which means the average value of those properties is far higher at around £225,000.

Not everybody wants to go down this road because there will be a lot more concern about future repayments and the possibility of securing a suitable mortgage in the future, particularly for those seeking a higher-value home, and as a result, many could miss the simplicity of the Government guarantee.

To discuss your mortgage options, please get in touch with McPhersons Financial Solutions on 01424 730000 or email info@mcphersonsfs.co.uk.