Why you need a retirement wealth decumulation plan and what it should look like
Retirement has changed. Life expectancy is longer, lifestyles are richer (and we don’t mean financially) and expectations are higher.
With these higher standards come complications of course, one of the most important of which is having a retirement wealth decumulation plan to drawdown your savings in a tax efficient manner.
Gone are the days when the only option available at retirement was an annuity. Gone are the days when you could pour your wealth into your pension and then reap the benefits in retirement.
In this new world of retirement, you need to understand all types of savings from pensions and ISAs, to equities and bonds. And you need to know how to take advantage of them in order to achieve a tax efficient retirement.
A mixed bag of pension reform
The recent changes to pensions are well known. You may now have the increased freedom and choice of early drawdown but if you buy the ‘wrong’ annuity or drawdown product, it can significantly reduce your wealth.
Added to which you can now only accumulate pension savings of £40,000 per year with tax relief and when you decumulate, all sums over the lifetime allowance (LTA) will be subject to punitive tax (unless protection is in place). And of course, the LTA has been reduced from £1.25 million to £1 million which may mean any existing plans you have, need an urgent review if want to avoid a large tax bill.
To complete an increasingly complex picture, annuity rates are volatile and final salary pensions are under increasing pressure. A complete overhaul of the system is promised by the government but where does that leave you now, as you plan your retirement?
Facing the future
Well it leaves you faced with innumerable questions: what do you do with your money, how, when and how much income should you take and safely take, how can you make sure you have enough money to live on for the rest of your life and what’s the most tax-efficient way to leave a legacy?
Unless you’re an expert, the chances are you’re going to need ongoing professional advice to help answer the above questions combined with some careful planning in order achieve your objectives.
Key elements of a good decumulation strategy
Decumulation planning should start well in advance of retirement
If you’re a regular follower of our blog, you’ll know that we take a sensible approach to investing: with us your portfolio is invested for the long term, avoiding volatility and dramatic gains or losses. It’s not about beating the market, it’s about meeting your financial objectives, now and in the future.
What that means is, that at Juno Wealth, tax efficient decumulation planning is a fundamental part of what we do from the very outset. In fact, our approach is comparable to good business planning – your exit strategy should be part of your business plan from day one.
There is no one size fits all strategy when it comes to decumulation
For a start, there are multiple options for you to consider when it comes to wealth decumulation and your different assets are likely to be treated differently by HMRC. What’s more, your needs and requirements are unique to you. That means your decumulation strategy needs to include an element of professional life planning to help you identify the sort of retirement you would like and what sort of legacy (if any) you want to leave.
Just with earlier life planning, your decumulation strategy should include careful cash flow planning and take into account your approach to risk. An inability to replace capital now that you’re retired may well mean you’re less tolerant to risk than you were, and your assets should be invested accordingly And with a retirement that may span 30 years or more, your needs will inevitably change at different stages. Foreign holidays and a new car may be your focus in your 60s and 70s but in later life, you may need to provide for your long-term care.
How you dovetail all the above requires a plan that is personal and bespoke to you. There is no one stop shop solution to buy into at the outset and there is no set, safe, once and for all withdrawal rate. You’ll need to keep your withdrawal rate under review and you may need to rebalance your portfolio on a regular basis.
You’ll need a diverse portfolio
Which brings us back full circle. This isn’t about beating the market. In retirement, you’ll probably want to avoid (or reduce volatility) and have sustainable and as far as possible, predictable returns.
You’re much more likely to achieve this by having a well-balanced and diverse portfolio which is kept under review by an expert financial planner.