Transcript
Scott Gallacher 00:00
Good evening. My name is Scott Gallacher, and I am a Chartered Financial Planner with Rowley Turton. I would like to thank you all for joining us this evening for a webinar on choosing the right options with your pensions if you are planning to retire in the next five years. Before we begin, I would just like to do a couple of bits of housekeeping. Your microphones are muted and the cameras are turned off for the presentation. This is just to minimize any disruptions. And there is a question and answers feature on the webinar. So if you have any questions, just type those into the Q and A bit. We will not stop during the presentation to go through those questions, but we will cover them at the questions and answer session. At the end of presentation, there will be a recording of this webinar sent to all attendees, so if you miss anything, you will get the recording and can go back over that. If you do experience any technical difficulties, do let us know in the chat. One of the things I noticed is that some people cannot see the full picture of the slide, and you can change that in the settings, which has a few options: zoom, ratio and fit to window. So if you have any issues, just try out the zoom and that should fix the problem. As explained in the messages about this seminar, there is a free copy of the Enough book, which we use to show how we do our financial planning. If you email Martin with your name and address, and I know that you have got the free book, we will send you a copy in the post in the next few days. Thank you for joining us today, and with no further ado allow me to pass you on to my colleague, Martin Stanley, another Chartered Financial Planner with Rowley Turton who will go through the seminar. Thank you, Martin.
Martin Stanley 01:48
Good evening, everybody. Thank you for joining us. My name is Martin Stanley and I am a Chartered Financial Planner at Rowley Turton. One of the most important things that I do in my day to day job is help people plan for retirement, both in the run up to retirement and at the actual point of retirement. And the reason it’s one of the most important things I do is because for most of my clients, it is also one of the most important things they are going to do. Really, it is bigger than buying a house. It’s bigger than a new job. And when you consider that most people’s pension funds, we hope, will be one of the biggest financial assets they’ve ever had, then it is a really important deal. You can compare the decision, I suppose, to buying a house, and I suppose that makes us something like building surveyors. And building surveyors and financial advisors alike probably get together when they’re in private and talk about where clients have got things right and got things wrong. Hopefully you will be in the first category. An example. My colleague Scott who you just saw told me a story earlier of a case where he managed to save a client £40,000 by having an insight into a particular aspect of pension law. That was the price of a new BMW, he told the client. And those of you who have been to the office will know there is a BMW office just around the corner. Unfortunately, of course, there are always ways to get things wrong. I hope none of you will be in that category. But we had a case recently where a widower sadly discovered late in the day that financial planning done in the past had left them at that point in financial difficulties. It’s a sad case, but those things can happen. Hopefully none of you will be in that category, and today is the first step along that road of giving you a bit more information, putting you in control. So you have got the power of knowing more about what you should do at retirement. So before we go on, I should explain there are two kinds of pensions we are going to look at, or one I am going to explain, and one we are going to look at, defined benefit schemes or final salary schemes. They were the gold standard for many, many years. And those of you who are lucky enough to have had a final salary scheme through your career, you are really in the golden generation, because for most of us now, those pension schemes have been phased out. Even public sector workers, NHS, the police, et cetera. It is being phased out for them. But like me, many of you, perhaps, have a small element of final salary pension in your portfolio. If you have that’s great, but most of us are relying on what is called a DC, a defined contribution pension, and that is what we are going to talk about today. We are going to explain how you take your DC pension and you turn it into your income in retirement. Let’s just simplify things. First, a DC pension might be a stakeholder pension, auto enrolment, workplace pension, like NEST. It might be a SIPP, it might be a SAS, it might be a personal pension. These all have slight differences between them on a technical basis, but really for most purposes, they are all exactly the same thing. So you can think of them all as DC pensions. Now with a DC pension, as it says on the screen, there. You have a pot of invested money, not like a final salary scheme, it is a promise of income in retirement. You have a pot of money that you earn over the years. You can invest in a wide variety of investments, not everything, but a wide variety. And how cautious or adventurous you are is up to you. One good thing is that if you die earlier than expected, then that money is not lost. That money goes to your family. When it comes to the size of your pension, well, size matters, the bigger the better. Obviously, the size depends mainly on a couple of things. Firstly, how much money has gone in from you and probably your employer over the years, and secondly, how successful your investments have been. Now, both of those are probably worthy of seminars themselves, so keep tuned. But for the moment, we are going to assume that you have built up a large pot of money over the years. You are now at the tipping point. You have decided you want to stop saving and start spending the money. And we are going to talk about how you can do that. Before I go on to that, just as an aside, we are talking about building up a large pot of money. Some of you might have seen last week in the Chancellor’s budget, there will be a couple of changes to pension rules, and one of those is there will no longer be a limit on the amount you can build up. At the moment, there is a limit of just over a million pounds, which sounds like a lot of money, but people do get there. But from the new financial year, the limit will be, with a few exceptions, unlimited. So if any of you do have a million pounds plus in pensions, I would encourage you to get in touch straightaway. As to how much you need, It is a burning question in lot of people’s minds. As a Chartered Financial Planner, I can tell you precisely that it is as long as a piece of string. There are a lot of factors that go into it, and most of them actually are not technical factors, but they are personal issues to do with you and your family, how you spend and what you want to do with your life. And that is why no two cases are alike. So we are assuming that you built up your pension fund, and you are now at the point you want to start talking about what you do with the money, so personal pensions or to sign contribution pensions are very flexible. They used to be less so, but now they are very flexible. We have simplified things a little, but there are three main options. I am going to go through these, in turn, and that’s going to be the bulk of what we are talking about today. The first one is pretty easy, and most of you probably already know this already, tax free cash. When you retire, you can take a quarter of your pension and a one off lump sum, completely tax free one go in your bank account. Do with it whatever you want. A lot of people use this for house renovations or giftings to children to start them out in life, or perhaps a fantastic around the world cruise. The one thing to say, of course, is that the more you spend in that first flush of excited retirement from your tax free cash, the less money you’ve got for the later years. So some caution is needed. Just before I go, I ought to say also that when I talk about retiring, I do not necessarily mean when you stop work, because you can take your pension benefits at the same time as you are working if you want it, you are not tied to a particular date. So that is the first one, the tax free cash, money that you can go and spend if you want it. The next two options are going to take up the bulk of our time. But before I go on, there is one thing to mention, which was, unlike the tax free lump sum I just mentioned, everything else, whether it is an annuity or income drawdown, is subject to income tax. And the way it works is just like you will be used to through your salary at work, you are paid a pension, and the pension company take off the tax money for you, and it is paid to the taxman by PAYE, and you get a pay slip, just like you are working. So you do not have to put in tax returns or anything of that sort. So the first option we are going to look at is an annuity.
Martin Stanley 08:48
An annuity is a very simple idea. It is basically a swap. You take your pension pot, which you have worked hard at building over the years, and you swap it or part of it at least, for a guaranteed income for life. You hand over your pension pot to the pension company, and they are typically the big financial companies that you will know of, people like Scottish Widows or Aviva or Prudential. Incidentally, I should mention that those policies, annuity policies, are guaranteed by the Financial Services Compensation Scheme, and so they are, when I talk about being guaranteed, they are as rock solid as anything reasonably can be in this world. So you swap your pot for a guaranteed income for life. The key thing to know is that it is for your lifetime, and that means that when you die, it finishes, and not ordinarily, with a couple of exceptions that I will touch on later, you get little or nothing back. So let us just explore that for a moment. Suppose that you and 99 other people were all retiring on the same day, all aged 65 and you all take an annuity. Well, of that 100 people, a few of you, hopefully you are in the audience today, will live to a great old age. You will live to 100 and get a telegram from the King. And so the money keeps paying, year in, year out it just keeps on paying. And so they will end up, probably those lucky people end up getting more money than they ever put in, in the first place. On the other hand, there will be some people who live much shorter lives than they expected, and they might not even get back the amount they put in. Everyone else will be in the middle. Now, what is really happening here is that the people who live shorter lives than expected are subsidizing the people who live longer lives than expected. Now, of course life is uncertain, so there is winners and losers here. You can see, and you do not know whether you are going to be a winner or a loser. Nobody does. So you might say, well, I will not bother then, but that misses the absolutely crucial central point about an annuity, the reason why you might consider it, which is that it is guaranteed. Once you take an annuity, nothing else matters. You know that come what may rain or shine, you are going to get your money for the rest of your life, however long or short that is. So that is the key thing about annuity. And if you remember nothing else, remember that it is guaranteed for your whole life, and you can relax. You do not have to think about it. You can just forget about it and enjoy the money rolling in every month. So we know it is guaranteed for life then. So the big question now is, how much can you get, and is it worth it? So what might you get? Well, you will not get the same amount as the guy next door, even if you take an annuity on the same day. And the reason is because there are several factors that affect what rate you get. And when I say rate, all I mean is, for each pound you put in, how many pounds, shillings and pence will you actually get out in a guaranteed monthly income? And when you take the rate you are set at that point, you are set for life, it is unchangeable. It is set and fixed. So the rate on the very day you take your annuity is what is important. So the first thing that is very important is interest rates. And this is the same thing that governs the interest rates on your bank account. It is no different. Behind the scenes, annuities are based on government gilts, which is kind of the way the government borrows, and they, in turn, are based on interest rates in the general economy. So you all know that for lots of years, interest rates have been terribly low, and money in the bank has given me nothing at all, and the same was true of annuities. But you will also be aware that interest rates have recently shot up, and now keeping money in the bank gives you some money, at least. And the same is true of annuities. It is a big difference. So I am going to show you a graph here. This goes back to 2006 beginning and right up to the present day on the right hand side. And you can see that in 2007, which remembers when we had what was called the credit crunch. At the time, interest rates came down, and they stayed down for a long time. Looking at this, it will not surprise you to know that financial advisors like me, for a long period, rarely spoke to people about annuities, not that they were not a good idea, but really the value was so poor and almost no client brought an annuity. From 2007 at the end of chart, it went down. But you can see on the right hand side there it shot up again. That means that annuities are very much in the public eye again. You might have seen articles in the newspaper. That might be what prompted you to come here today. It is certainly what prompted us to think that this is an area that people probably want to hear us talking about. So interest rates depend on interest rates in the economy, and they have gone up a lot recently. So that is the key thing to fix, how much you might get for an annuity, and the second one is your age and your health. So remember, the annuity pays for your whole life. So how long that life is is a pretty crucial thing. Obviously, if you are young and healthy, you are expecting to receive an income for a lot longer than somebody who is elderly and perhaps not in good health. So the annuity companies know this, obviously, and so they take that into account. So a 75 year old will not be offered the same rate as a 55 year old. The way it works is, the older you are, the better rate you get, and the better rate you get if you are unhealthy as well, also if you are a smoker. Basically, the annuity company assumes that certain people will not live as long. For the health aspect, by the way, it is like life insurance. You fill in a form, you send that off, an annuity company assess that and tell you what rate they are willing to offer. By the way, just on the health aspect, you might be surprised to know that your postcode can also make a difference. Without turning this into a sociology lesson, everybody will know that people who live in nice areas usually live longer lives statistically, and people who live in less well off or deprived areas even tend to live shorter lives. Now that is sometimes taken into account, your postcode, on an annuity, not always but it can be. So interest rates, age and health are the key things. Interest rates have gone up recently, and the older and unhealthier you are, the better rates you will get, because you will not live quite as long to receive as many payments. So those things are what matters. You cannot really do a lot about yourself. They are not decisions you make, although you could decide to defer your pension a few years until when you are older, and you get more. What we are going to go into now are the things in which you make a conscious decision, and this affects the rate. And there are two things we are going to talk about here, widowers protection and inflation linking. Now I said a minute ago that it goes for your life, and then it finishes. That was a little bit of a simplification, because in actual fact, you can choose one that goes for the life of your spouse or partner as well. It is simply called a joint life annuity, and it pays for your life. And when you die, if your spouse or partner is still alive, it gets paid for the rest of their life as well. You might choose one that carries on at the same level all the way through, or you might choose one that drops down to 50% or 75% on the first death. Now this is worth talking about a little bit, because there have been cases, quite distressing cases, sometimes of people who have been tempted by a single life annuity on the basis that you get a little bit extra money, because for joint life annuities, the annuity company expect to pay out a little bit longer. And so the rate you get to begin with is a little bit lower. And if you approach retirement and you think, I want to maximize my income, I will tick the box to say a single life annuity. And the rationale is, we will probably die at the same time anyway. I am sorry, but often that is not the case. And a case recently, and quite a few cases over recent years, highlighted that sometimes people can be left in the lurch by that decision having been made by one partner. Now it is not always important, because there might be other financial assets in the family, different kinds of pensions, different types of wealth, but it is something always to think about carefully, so much so that some annuity companies now have started asking people to sign waivers or disclaimers, so that if somebody is left in the lurch financially, it is not their fault. So widowers protection you can add on, it means you get a slightly lower rate because they pay you for longer. But that is something you can do, a choice you can make to affect the rate you get. And the last thing we are going to talk about on what affects your annuity is inflation linking, this is something which has been on everybody’s minds for quite a while now, because inflation has been so high, so it is worth taking a little bit of time to talk about this, and especially so because as a financial advisor, I find an awful lot of people underestimate the effects of inflation, because ignoring the last little period, which has been on everybody’s minds, in general through my life, inflation was a creeping, gradual thing, you did not really think of it as a powerful force in your financial planning, but it really is. So, for example, if you bought an annuity that gave you £1000 a month at age 60, and you live to age 90, you would expect next year, it would buy a little bit less stuff. By the time you got to age 90, you would probably find it bought half as much stuff, half as much. Now, your bills do not go down that much, and nor does your spending normally. Now, of course, that depends on what inflation rate you assume over the years, I have assumed a modest long term rates there. But because your spending power can go down over time, although you can get an annuity where you factor in inflation linking, and all that happens is the annuity automatically goes up every year, so every year you get a little bit more. You can opt for ones that go up by a particular percentage, 2.5%, 3% or one that goes up by CPI, for example, which is the government’s preferred measure of inflation, and it is all you hear about on the news. But of course, there is no such thing as a free lunch, and if the annuity company knows that for years it is going to have to ramp up your income, every single year, then obviously they are going to start your on a lower level to begin with. Now, deciding whether or not you want inflation linking on your annuity is actually not as simple as it sounds. We had a talk in the office recently and decided there are three kinds of approaches to this, three kinds of people that we see in the office. The first person is the cautious person who says, I just want to know that my income is going to have the same buying power all the way through. I do not have to think about it or worry about it. I just want to know that I am secure. So they are the cautious people, and that is perfectly fine. However, another person might say, I want to maximize those first 10 years of my retirements, the golden years, the years when I am fit and healthy enough to travel and play golf and do things. So I want the most I can get in the first period, even though I know that later on, it is going to become less valuable. Those are the people who talk about fabulous holidays and look forward to retirement keenly. I am in that category myself, although I am a long way off retirement unfortunately. The third group of people, are the people who say, I want to extract the maximum pound, shillings and pence from this annuity. How do I do that? So then we start looking at graphs and crossover points and factor in tax. These are the people who turn up to our offices with their own spreadsheet already completed, and they are the detail focused people, which is fine again, there is no one size fits all approach to this, although what cuts off everything is that it is very important to think about inflation and in some way to factor it into your planning. Before we move on from these things that affect what rates you get and how much money you might get for an annuity, there are a couple of things I will mention that I am not covering in detail today, other things that might affect the rate, and they are two things called value protection and guaranteed period. These are things, although I said that with an annuity, when you die you get little or nothing back. These are options that mean you can get a limited amount back. I am not going to cover them in detail today, because they will muddle things a little, but if anybody would like to talk about those later, we certainly can do. I have talked about this all important rates, the rates that determines what you get. So let us have a look at some examples and talk through some of it. At the bottom left, you see a healthy 75 year old, and the first box is £8,418. That is for the £100,000 pot, which they put in. That is a pretty good rate. That is a single life, so they are not protecting their spouse or having inflation proofing on it, and they are relatively elderly, so they get a good rate. In the box above is a 65 year old, and unfortunately, they have got health issues. They have got an extra 10 years to be paid, and so you might expect their rate to be quite a lot lower, being 10 years younger, but it is not that much lower, a bit lower but not a lot. And that is because of their health, unfortunately, and the annuity company think this person is not going to live a long life. So that is why there is a distinction there. If you look at the top right of your screen, the top right says £2400, and that is the worst rate here, that is for a 55 year old, so he has a lot of years to be paid, so his rate is relatively low, and he is healthy, so that does not affect things. Also, he wants all the bells and whistles. This guy wants to protect his wife with 50% pension and also inflation proofing, so he gets £2400 a year, whereas our healthy 75 year old gets £8400, it is a huge difference. And so you can see that really there is a very wide range. These figures, by the way, are from a few weeks ago.
Martin Stanley 24:01
Let us recap on annuities. An annuity gives you a guaranteed income for life. It is set and fixed, and it never changes, and how much you get at the outset depends on the day you secure the rate. What is the interest rate? How old are you? How is your health and what options have you added on in terms of inflation proofing and a spouse’s pension? The guarantee is fabulous, but the trade off is that it is fixed and inflexible. You cannot ever change it. And remember right at the beginning, I said that if you die, then you get little or nothing back normally, and if you are one of the unlucky people who die earlier, then you would have lost out. So that is a whistle-stop tour around annuities and how they work. I am now going to go on to the other option, which is income drawdown. There is no need to take notes, because I will have a side by side comparison in a little while. Remember, I said that for an annuity, it is basically a swap. You change one policy for another. A pension for an annuity, it is a different policy entirely. With income drawdown, there is none of that. You do not swap at all. In fact, you might carry on with the same pension policy that you have had for years and years, adding your money in month by month, although a lot of people take the opportunity to move to a more modern pension. You do not have to if you do not want it. So how do you get your money out then? Well, there are no rates. You do not have to secure a rate, because how much you get just depends on how much you want to take. It is your pension, because drawdown, simply put, means dipping into the pot and taking how much you want out. Some people prefer to dip in on an as and when basis, taking lump sums here and there. Most people though, decide to replicate how it was in their working life, so we organize to get a monthly withdrawal from their pension pot, and that gets paid straight into their bank account, just like salary would have been, and just like salary as well, the tax is taken care of by the pension company. They pay it straight to the tax man, and you get a payslip. So it is very easy, just like the annuity. You pay tax on it. So I said that the annuity was simple, and this seems even easier. You just take money out when you want it. So let us have some advantages and disadvantages for this. The big advantage that people often focus on is that in the event of your death, whatever is left in your pension fund is not lost, unlike with the annuity. The money is still there and it goes to your family or whoever you nominate, even a charity. This is a huge difference, and it can make a big difference to some people. Some people have very specific needs. For example, a client I knew some years ago said to me, when he came to this point, “Martin, my father died at age 65 of heart disease, and my uncle died at age 65 of heart disease. And my brother, he is not looking good, and I might not make a great age. So I do not want an annuity where I am going to get nothing back. I want to have income drawdown where I know any money I haven’t yet spent, goes straight back to my family.” Now, last time I saw that fella, he was fitt and well, and I hope he stays that way. But for him, this is a very important planning point, to make sure that he got his money back, or as much of his money as he had not spent. That is the first key advantage of drawdown, money back to your family. The second one is flexibility. The annuity we looked at was completely inflexible. It is set and fixed and it never changes. You cannot go back, you cannot change it. It just pays every month for the rest of your life. But with drawdown, you can stop, start, increase, decrease. Take lump sums. Take regular monthly, quarterly amounts, however you want it. It is your pension, and you decide. Often people choose to take for the first 10 years or so, they take more, much more sometimes, because that is the golden period where you are traveling and spending and being more active, and then take less in later years. It is also great if you need to smooth out your financial planning. For example, perhaps you are retiring at 60, your state pension which is £10,000 each normally, is not until age 67, so you think “I have got a gap to fill”. That is fine with the flexibility to drawdown. You can fill in the gaps and make it smoother over the years. That is the second advantage, that flexibility. On that flexibility, you could even if you wanted to take all your money in one go, one huge lump into your bank account. However, although it is very tempting, it is usually a terrible idea to do that, because having it all in one tax year means that you shoot up into the highest tax bands, and you spend a lot of money on tax. It is far better to take it over a number of years, or more usually your whole life. So that is the second advantage. The third advantage, is that the money is still in a pension, and it is no different. It is still the same pension, it is still invested, so you still hope for good investment returns, and if you do well in your investments, then you make more money. You can spend more money, and the money might last longer. So that is another advantage. And it all sounds pretty fabulous. So just to recap, you get money back to your family on death. You get complete flexibility and the opportunity to make more money. You are not closed off from more investment opportunities. So that is great, but of course, there are disadvantages to go with the advantages, So let us just get on to those. And really there is one, which is that, unlike an annuity, you have no guarantees, things can go wrong. For example, one problem is if you get carried away and spend more than is sensible, especially if you take lump sums. We have seen before, where people jeopardize their own financial security to take out a large amount of money to give to their kids. Well, the kids might want it or deserve it, but it can jeopardize people’s financial security if they spend too much or are too generous, also if investments do poorly. We all know that investment go up and down, and sometimes investments do not do as well as hoped. And if that is the case, you might find yourself with less money than you hoped you had, and that might mean you face a possibility of a lower income than you thought you were going to get. These are both really important points, especially for the reason that at this point in life you can go back to work, but most people do not want to, and so the opportunity to repair any damage done, to work your way back again is fairly limited. You do not want to be one of those people that have to go back into work at the age of 75 to earn a crust. The other disadvantage of drawdown is that it is more complicated, and annuity is completely simple. You just do it and forget about it, and the money rolls in. With drawdown, you have to monitor it. You probably need a financial advisor to help you with the investment side of it and a few technical aspects. For example, at Rowley Turton, we always insist that a client has at least an annual meeting where we project forward, go through, make things stay on track, and make sure that everything’s exactly as it should be and that we are not diverging or storing trouble for ourselves. So that is income drawdown’s advantages and disadvantages. The advantages are great, but the disadvantage is you must be prepared to put up with those potential disadvantages of investment returns and that temptation to spend a little too much. Before I go on to compare the two, I should say that you can choose both. For example, you could choose to put half of your pension into an annuity in order to secure a base level of income. You know, it is completely guaranteed that you will never get less than that. But with the other half, you might say, “I want the flexibility or the opportunity to do well in investments”. And so you might go half and half. With annuities, you cannot unwind that once you go into an annuity that is fixed and set. But with drawdown, you always have the opportunity to take whatever’s left in the pot and put it into an annuity in later years, if you decide, “I do want that financial security after all, and I’m willing to go with the annuity rates”. So I promised you a side by side comparison, and here it is. There are a couple of main advantages and a couple of main disadvantages of each so really it is a tie. We have got simplicity versus some complexity. We have got a complete guarantee, which is the main feature of an annuity. And with income drawdown, no guarantee, but certainly you have got opportunities. An annuity is inflexible and a drawdown is very flexible. An annuity, you get little or nothing back on death. With income drawdown, you get that, whatever is left. And with an annuity, you are locked into the rate on that one day you retire, but with income drawdown, you keep your options open. I have simplified things there, obviously, and that’s the object of a seminar or webinar, after all, is to simplify things for you to make things clear. But the truth is, of course, is that what is right for each person is as individual as we are. And I am not just saying that because we have people sitting in this very room I am standing in now every week, and they are all very different, and very rarely do we see the same combination of needs, requirements, fears, hopes and objectives.
Martin Stanley 33:25
That is why a big part of what we do as financial advisors is tailoring things through individual circumstances. And with that in mind, I would like to take this opportunity now to invite each of you watching this to get in touch. Come in, sit down in the boardroom here. We could talk things through with no commitment to you and see where you go from there, and perhaps start the progress of planning your retirement, even though it might be a way off yet. For now, though, let us have a look at a summary of the factors that might make you go for one thing or the other, just to recap. So an annuity is for those people who like to keep it super secure and super simple, and they also want to avoid investment risk, an awful lot of people, quite fairly, are a bit scared of investments. They do not really understand them, and that is fine. Those cautious investors might just want things simple so they do not have to worry about things. And annuity is also suitable for those people who are not overly concerned about I must leave the maximum amount of money to my next of kin or my children, the key thing is securing your standard of living now. Income drawdown, on the other hand, is for people who do not necessarily want or need to secure income. They are willing to take some risks, they are happy with some investment risks. Perhaps they have already got ISAs or investment bonds already, and so they are more familiar with it. People who want flexibility, that is an absolutely key thing. And these people might have other secure income, and that will affect how they take part of their income. If they say, “I have got a base income of my final salary scheme or my state pension, so I am willing to have part of my money on this income drawdown basis”. And lastly, these plans are very suitable for people who are concerned, and I gave the example earlier, a man who thought he might die early, who are really concerned about passing on the maximum amount to their next of kin. So where do you go from here, which is perhaps what you attended for today? Well, I have tried to make things clear and simple of course, in a seminar. However, we cannot get away from the fact that people’s financial planning is more complicated than I have made it sound. At Rowley Turton, we tend to think that the most important thing, above everything else, is for people to have a really clear view, a really clear plan of what the future holds, because when you have got that, it lets you live your life better. It gives you a confidence and a certainty, and it lets you stop worrying about things. Getting to that point is not necessarily easy, because of course it is not simply as I have made it sound, about the difference between annuity and drawdown at all. There are lots of other things as well. We jotted a few down in the office earlier today, all these questions, so I will go through a few, questions like how much will you be spending and will that change? What about your other investments? What if there is really, really good investment growth or really poor investment growth? How will that affect things? How do you factor in inflation? I want to help the grandchildren, can I afford to and if so, when? What if one of you were to pass away? Here is a couple of big ones. What is your margin for safety? Like, is it wafer thin or have you got a comfortable cushion? And the biggest one, the one that we really feel pleased and proud of helping people the most. Where is the balance in your circumstances between, on the one hand, spending too much and the other hand being overcautious and stinting yourself unnecessarily? You will be able to think of other questions, I am sure, depending on your own financial circumstances. Before I go on from that, I just will say that some of those questions, the really crucial thing is that a lot of them are things that you need to think about in advance. So we normally say for rough rule of thumb, start planning this about five years before the earliest stage where you might retire, and that means you have got plenty of time to adapt things and change things and get things on track. So anyway, I went through some of the key questions there, and obviously they complexify things, they make things difficult, and they can get a bit tangled. And here is the pitch. This is what financial advisors can do for you. They can help you to untangle all this and give you that clear view of the future that you can rely on. One of the tools we use as Chartered Financial Planners is called Cash Flow Planning, lifetime Cash Flow Planning, and it is a kind of sophisticated computer software that can project forward over time, take into account lots of variables and show you possible futures. We can play with different options in different futures on what ifs, and that gives you a clear view of well, what can I do and what can I expect? Although it is a powerful and sophisticated tool, it really is a powerful tool. It is designed for clarity from your point of view, and the objective is to help client’s to have that really clear view of the future. And this is not just airy fairy pie in the sky projections either, these are things that you can hang your hat on. The idea is to give you something which can help you make decisions and set your expectations on a really solid basis. We can fine tune and look at all the different possibilities for you. And in that, the biggest and most burning question for a lot of people is, when can I retire? It is not necessarily the date on your pension paperwork. I can tell you that for nothing, it might be sooner than you think. We can work out, what are your margins for safety? When can you retire? What is sensible? What is your spending going to be at different times of your retirement? So this is another good reason not to delay your financial planning, because we might be able to tell you that you can retire earlier. So working with a financial advisor can have quite a few benefits. And again, I would like to invite each of you to get in touch and come and sit down and make a start. I will wrap everything up before we go on to questions. I have given you a quick talk through the differences between tax free cash, income drawdown, and annuities, and like much in life, if you really had to boil it down to one thing, you probably should not, but if you really tried to, it comes down to would you take a cautious approach or a less cautious approach? And there are pros and cons of each. I hope I have also emphasized that there are a lot of interlocking things here. It is not as simple as simply plumping for one or the other, and so most people should have a really solid financial plan, not just back of an envelope stuff, but a good, solid plan looking to the future, taking into account inflation and investments and all the rest of it, in order to make sure they have the best chance of a secure and happy retirement where they do not have to worry. As I said before, I would be delighted to meet any and all of you who would like to who would like to talk to us. In the meantime, though, as Scott mentioned earlier, we would like to send each of you who would like one a book which outlines the financial planning process, that series of projections, that sophisticated projection systems that we use, and so please email me and ask for a copy, and we will get that straight over to you. Now that brings me to a close, so I will now hand you back to Scott, who has reappeared on my screen, and I will take any questions you would like to ask. Thank you.
Scott Gallacher 40:40
Thank you very much, Martin. A couple of questions, the easy one is can the slides be sent to us? Yes, that is no problem to ask when they will be sent out to everyone. Then Linda asked, is drawdown the same as UFPLS in essence? Yes, technically UFPLS is where you take your pension in a lump sum. Albeit we often take it in a series of lump sums, whereby of that lump sum, 25% typically is tax free cash, and 75% is taxable. We generally regard it under the drawdown as a type of way of retiring. And often we will use drawdown via your PLS type approach, so we have somebody who has got a pension pot, so it is a £400,000 pension, rather than perhaps having £100,000 tax free cash all set, and a £300,000 pot, which then they take, either binary or do drawdown off. You might want to do UFPLS, where you take that £400,000 pot. And say, you need £1000 a month. You would take the £1000 a month for UFPLS. And what that means is that £1000 that you are drawing down each month is actually £1000 of what is technically a uncrystalised fund. So 25% of it, £250 of that £1000 would be tax free cash, and £750 will be taxable income. The reason that you might want to do that is because it leaves a pension larger in that sense, the pension is invested and it is tax free. There is no income tax, capital gains tax on the pension as it invested. You are only taxed on the money you take out, and a quarter of those withdrawals are therefore tax free because you are using this tax free cash allowance. And if the pension fund grows up, you can potentially have more tax free cash because that pension pot can grow, obviously it can go down, so it could be smaller. So yes, we would put it under the umbrella of drawdown, and people use the terms, but in a whistle-stop tour, I think we would say it is drawdown. So hopefully that is cleared up. Somebody else asked, is it possible to purchase more than one annuity? For example, could you use 50% of your pot for annuity and the rest for drawdown, and then later on, I have changed your mind, and use that drawdown pot to purchase another annuity. Yes, you could slice and dice your pension pots in a number of ways. So you might want to think, Martin mentioned, if you have got a state pension due, but you are retiring early, you might want to split your pension plan kind of in three. You might say, “I am 60 now, I know my state pension is due at 66 or 67 depending on your age.” So that is fairly secure, but maybe the state pension is enough. So what you might want to do is buy an annuity, possibly today, to kind of top up your state pension. So that is your bread and milk, and your gas and electricity. So state pension and an annuity, possibly indexing, possibly not, and then take drawdown for the balance to cover that period from 60 to 67, that is one way of doing it. There is other ways of doing it. You might want to leave part of your drawdown pot because you think you do not need it. So you might want to secure a level of income and then leave some drawdown pot later. And again, you can do, as Martin said, if you are doing drawdown, whether or not you bought annuity with some of the money. If your circumstances change or rates change, as the interest rates increase, you could jump from one to the other, where you can jump from drawdown to annuity, which actually you cannot jump from annuity to draw down, because annuity is a one off decision. So you can do that. And again, it sounds awful, but if you are married, and you are not sure whether you need to include a widow’s pension or not, you might not want to buy a single-life annuity because you might want to protect your wife. You might not want to buy a widow’s annuity because maybe that costs you too much. You might do drawdown. But then, if your wife has predeceased you, or your husband predeceased you if you are the wife, then you might then think, I can buy a single-life annuity now, because I have not got anyone to protect so you have got a lot more flexibility in that. And equally, if your health changes, on one hand, you might not want to buy annuity, because you might be worried about how long you live, but the annuity rates might be better, and you might think, ” actually I can secure quite good level of income”, and we have done that for clients in the past. Hopefully that answered that. Another question, what are the advantages and disadvantages of leaving pension pots with the pension company or employer scheme until sometime you have to retire, until you want to do something with the money. There are a couple of advantages. Primarily it is around tax. So pension pots are generally income tax and capital gains tax free in terms of the investments, so you are not paying tax on it. So if you have got a pension pot and you do not need the money, then there is an argument for leaving it there, where it is effectively tax free growth. Rather than taking the money out, paying income tax to get the money in your name or you could even have tax free cash free, but then having to invest it in a taxable bank account or investment in your own name. So the first thing is tax free growth. Secondly, pension funds generally are exempt from inheritance tax, whereas money in your own name is subject to inheritance tax. So again, if you have got an inheritance tax problem, or might have an inheritance tax problem, and this is one of the things that we do a lot with clients, the idea is to spend down other monies first. So you’ve got your house, cannot do a lot with your house. You have got savings and investments, ISAs and things, and then a pension. You might be better to bring down the savings and investments, which are generally subject to inheritance tax, and let the pension grow. So that is the other main reason. And the other point is you may just not be sure what you are going to do, and you may not want to make a decision so you can kind of leave it there, possibly drawdown for some for initial period whilst you decide whether an annuity or not is the option for you. Is that okay? Question from Carolyn, if I take my 25% lump sum, will it be classed as my state for IHT purposes? Yes, in simple terms. And this is one of the reasons that we might encourage certain clients not to take the 25% lump sum, because whilst it is tax free coming out of the pension, so it is a multi allowance issues attempt at the moment, then it is going to drop in your estate, and in the essence, it is then going to be taxed at 40%, so if we take the £400,000 pot I mentioned earlier, we have got a client who has done very well. They have got a very nice house, they have savings and investments. They have married, got a total estate of £1 million. If they take that £100,000 tax free cash from the pension and put it into their estate, they put it into a bank account, put it into ISAs over a few years, green bonds, whatever it is, then their estate is suddenly £1.1 million. And then when they die, interspousal transfers are exempt. But when it dies and goes, to kids or grandkids, then they will pay 40% on that £100,000 excess. So whilst £100,000 has come out of the pension, tax free, it then sits in your estate, and you lose 40% of it in inheritance tax when you die. There are ways and means of thinking about giving it and holding it to certain assets that may negate that to some extent, but it is a big factor that we consider. I think that is all the questions gone through. Thank you. Have you have you got any more points Martin?
Martin Stanley 48:02
No, I think that is everything, other than to say to everybody, thank you very much for attending this evening. Thank you for giving up your time, I hope it has been interesting for you. I hope it might have set your minds racing, and if you would like to race in this direction, we are very happy to have you in. You can sit down and we can chat through things. The meetings here at Rowley Turton to begin with are always entirely, sort of free and easy and entirely at our expense. So if you would like us to explore options, drop me an email and I would be glad to hear from you. But that is it from me. And thank you and good night.
Scott Gallacher 48:34
Thank you everyone, good night.
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Martin Sigrist
Rowley Turton client since 2015