Keeping your options open
A recent study by Friends Life indicated a significant shortfall between the income people expected to need in retirement and what their savings were on track to deliver. The study broke the numbers down on a regional basis and showed that savers in the North East and South West were likely to be the least disappointed. Nationally though people expected to need £409.10 per week, but were likely to have to make do with far less than that: £312.40 to be precise, a shortfall of £96.69 a week.
The more encouraging survey finding though was that people were planning to accumulate a “basket” of products and sources of income to fund their retirement. Whilst the recently introduced freedoms have made pensions significantly more attractive, the lesson of recent history is that a variety of income sources provides the best chance of optimising your affairs to provide the most resilient and tax efficient income in retirement.
Indeed I touched on this a couple of months ago when discussing “Taking a tax-efficient income in retirement”. So when 29% of pre-retirees surveyed indicated that they intend to supplement their retirement income with a savings account and 18% plan to use a cash ISA, this is an indication that people are thinking flexibly. ISAs share a number of the tax advantages of pension. Crucially, even though the inheritance tax advantages are far more limited, ISA withdrawals are free of income tax. This makes them excellent vehicles to top up income if your level of pension drawdown is close to pushing you into a higher tax bracket in any given year. Indeed ISAs the arguments for drawing down ISAs first are persuasive precisely for the reason that they are income tax free, but aren’t easily passed on the future generations.
One particularly interesting aspect of the survey is that whereas 17% of people approaching retirement were thinking in terms of either downsizing or selling their property to unlock funds, only 4% of retirees have actually used funds from this source.
This would rather suggest that most savers will be a little more circumspect about investing their hard-earned pension pots in buy-to-let properties than the recent hype might suggest. BTL though might be a viable proposition for excess funds not already enjoying the tax advantages of a pension. That though is a story for another day.
Take care out there