The rising cost of living will impact all of us in different ways, depending on where we are in our lives and careers. For the retired, even those with relatively comfortable pension cushions, the current economic climate brings a particular set of challenges.
The significant increases in cost of living, driven by escalating inflation and rapidly rising fuel prices as a result of the war in Ukraine, could require a rethink of how you structure your retirement income. Here are some options to bear in mind.
Flexibility of pension drawdown
The majority of retirees generate the bulk of their income from pensions – state pension, company pension, annuities and drawdown pensions. Some of these are fixed and cannot be increased – other than Consumer Price Index, Retail Price Index or inflationary increases on defined benefit or state pensions.
Those who also have deposit-based savings are able to cover extra costs by dipping into these monies as necessary. But not everybody has the availability of an emergency fund like this and even those who do will be concerned to see the pot deplete.
However, pension drawdown is flexible and income can be adjusted to suit your circumstances. It is the process of leaving the pension pot invested and drawing an income to suit your requirements. It allows you to have full control over the amount, timing and frequency of the income you take from your pension.
If you work with a financial planner, they can help you assess the sustainability of your drawdown income and whether it can be potentially increased even for a temporary period until the economy calms down. The planner will consider all aspects of your financial circumstances including taxation and risk before recommending any change to a drawdown strategy.
Tax wrappers and investing
There are further ways of generating income from various assets and tax wrappers. Mainstream tax wrappers such as investment ISAs, Open Ended Investment Companies (OEICs), unit trusts and onshore and offshore investment bonds can all create a very tax-efficient stream of income to supplement pensions. This can take the pressure off the pension as being the only source of income and potentially depleting in value, which is especially important in times of high volatility and high inflation
There are additional options for generating additional tax-efficient income which may involve higher risk investments which can sometimes be appropriate for more sophisticated investors. These would include investing in AIM (Alternative Investment Market) solutions or the ever-evolving suite of VCT (Venture Capital Trust) products available in the marketplace.
Some people might have a rental property or properties that they also use as an income stream in their retirement and there may be scope to increase rent in line with general cost-of-living increases, which can potentially offset rising costs.
In every case, a financial planner can advise on utilising investments to generate income on a monthly or ad hoc basis to suit the client’s objectives and, again, will analyse attitude towards investment risk, sustainability of income and tax position to create an income strategy to suit.
Cashflow modelling for confidence
Clients need to be confident and reassured that any changes to a retirement income strategy are the right course of action, particularly in economic circumstances as volatile as the present. Using cashflow modelling is a valuable exercise that can be an illuminating and supportive way to build confidence in a new strategy.
Cashflow modelling is a process that brings clarity to an overall financial position and can stress test any income strategy against any range of likely and unlikely events. This gives clients the peace of mind that every eventuality has been accounted for and that their new financial plan will provide the financial support and stability they require despite market volatility the likes of which we saw during the pandemic or following the Russian invasion of Ukraine.
Often clients do not want to see their capital deplete in any form but, when coupled with robust cashflow planning, it can be seen as part of an overall strategy within an income plan and may create more freedom and flexibility and achieve the income to support their desired lifestyle.
If you would like to discuss your retirement income, or any other aspect of your financial planning, please get in touch.