Investing for a More
It's been nearly a year since the new pension freedoms came into effect. Since 6 April, 2015, the over-55s have enjoyed much more flexibility over what they can do with their pension pots. Under the new rules, they can access as much of their pension as they need to and as many times as they wish without having to buy an annuity, and 25% of lump-sum payments are tax-free. So how have retirees been using these new freedoms?
Just six months after the changes came into effect far fewer people were opting for annuities than before, with only the more affluent savers staying with them. Predictions that many pensioners would withdraw their money and invest in buying property to let didn't come to fruition. It seems that most have opted for alternative investments in the form of drawdown. This is where some of the funds can be withdrawn while the rest remains invested. In the first three months after the change, the value of drawdowns and the number of policies sold more than doubled compared with the same three months the previous year.
While some polls suggested that over-55s planned to spend their newly freed-up cash on holidays and home improvements, other research showed that retirees intended to use their pension pots to pay down mortgages and other debts or to help out their children and grandchildren.
Getting the Best from Your Retirement Funds
There are still further alternatives to making your pension pot work for you, which will mean making some independent investment decisions. Taking control of your own investments doesn't have to be a complex affair. It's all about keeping the balance between an acceptable level of risk and the maximum amount of return your investments can provide, which you can achieve provided you keep a few basics in mind.
1/Don't be afraid of investing some of your money in shares. Historically, shares have provided a better return than interest on lower-risk cash or bonds, but of course, there is no guarantee they'll always do so.
2/ Don't invest all your money in shares of similar companies, as they're more likely to rise and fall together. If they don't do well, then you'll lose out. Diversifying your investments means that it won't matter so much if one of them isn't doing as well as the others. Managed funds are often already well diversified, but if you choose to invest in specialised funds, it's a good idea to spread your risk over different types.
3/Check your investment choices on a regular basis. It's good practice to check at least annually to make sure that you're still happy with your portfolio and that the charges are still acceptable.
As you get closer to retirement, you will want to be certain that your investments are appropriate for whatever you've decided to do with your pension pot. Lower-risk investments will help protect against fluctuations in stocks if you're buying an annuity, but you may need a different strategy if you are considering income drawdown.
While the new freedoms can be advantageous, there are pitfalls associated with them, too. For example, too many withdrawals in a single tax year could push you into the 45% tax bracket - something that can be easily avoided by planning your withdrawals carefully over a longer period of time.
For more guidance and help in understanding the current pension options, you can book appointments with Pension Wise, a free and impartial government service, or alternatively with the Citizens' Advice Bureau. It's also a good idea to consider talking over your options and strategies with either an accountant or a personal financial adviser. While their services are not free, expert advice is a good investment in itself.
Finding a good financial advisor or accountant isn’t always easy, but using a trusted online directory can be a good place to start.
About the Author: Richard Symonds is the director and founder of Bristol based Trust Local and has been helping create growth opportunities local businesses since 2011. Richard has years of experience helping companies across a range of sectors build networks and establish trust amongst their customer base. You can connect with him on Twitter, Facebook or LinkedIn.
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