Four years ago, the Government brought in a rule change that had dramatic consequences for retirees.
The reforms, known as ‘pension freedoms’, gave savers unprecedented flexibility around how they spend their hard-earned cash in retirement.
But with that freedom comes a huge responsibility to ensure you do not run out of money and end up living on the poverty line in old age.
Four years ago, the Government brought in a rule change that had dramatic consequences for retirees. The reforms, known as ‘pension freedoms’, gave savers unprecedented flexibility around how they spend their hard-earned cash in retiremen
Alan Plant, a 74 year-old retired engineer from Sutton, Surrey, is a textbook example of the way to make smart choices to avoid that kind of fate. His savvy investment strategy gives him an income of around £40,000 a year, which means he can enjoy cruises and other luxuries with his wife, Valerie, who is 75.
Before the rule change, most people simply bought an annuity, which is like an insurance policy that guarantees to provide a set income for life.
While this is still an option — and for many people a wise choice — those who feel confident managing their own investments can instead now opt for something called drawdown, where you keep your money invested in shares and funds and take out an income as and when you need it.
This approach is not new, but before the rule change only the wealthiest pensioners could choose this option, as retirees had to prove they had a guaranteed pension income of at least £20,000 before they could use drawdown.
Alan sold his engineering firm to his business partner in 2005 at the age of 60, but continued to work for the company part-time for another ten years. He had several pensions from previous jobs, which were worth around £4,000 a year.
Before pension freedoms were introduced, he was not allowed to use drawdown, as his income was too low. When the changes came, Alan was delighted, as it meant he could reinvest his money to try to build up a larger sum for the future.
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‘I was never going to fritter away my pension, but the changes meant I could spend the money I had saved in the way I wanted,’ says Alan.
His financial adviser, Darren Collett at Elmwood Financial Consulting, recommended he move his £170,000 savings and annuities to wealth management firm Brewin Dolphin, where he could access drawdown.
Drawdown is not for everyone, Alan warns. Those who cannot afford to lose any money on stocks or funds might be better off sticking with an annuity, which offers greater security. But Alan was willing to take a risk with his investments to try to build a bigger income for the future.
Most pension savers are advised to take a more cautious approach as they move closer to retirement, because they will have less time to recoup any losses. But in Alan’s case, his strategy paid off and the fund peaked at £242,000 in 2017.
ALAN’S TOP TIPS
Make sure you have savings in a rainy-day fund, so you are not relying on taking money out of your investments at short notice in an emergency.
Ensure your investments are spread between a diverse range of assets, including shares, bonds and property.
Check that your will is up to date.
His best performing investments include Fidelity Emerging Markets, Findlay Park American Fund Sterling Hedged and Liontrust Special Situations Fund, which have all turned an investment of £1,000 into £1,400 or more over the past three years.
Alan takes around £15,000 a year out of his investments as his annual income, a quarter of which is tax-free. Also, he has a full state pension and some earnings from Isa investments, bringing his total income to £40,000 a year.
Careful planning — with the help of an adviser — means he is taking his money efficiently and pays around only £3,545 in tax a year. Alan and Valerie never imagined they would be able to afford to travel as much as they do.
The couple have lost count of the number of cruises they have taken — it has been two years since they celebrated their 500th night at sea on a Saga cruise. They have visited countries including Sri Lanka, China and New Zealand, plus Antarctica.
Alan says: ‘When you have worked hard all your life for your money, it has not been handed to you on a plate, so you deserve to enjoy it.
‘We intend to keep travelling and have already booked a trip to New York for Christmas.’