Life in Retirement

Life in retirement (70+)

As life expectancy has increased there are still important financial decisions to make during your retirement to ensure a comfortable standard of living. Changes to income in retirement rules means today it is much easier to leave pension funds invested in the stock market and other assets, so they can continue to grow while also providing an income through regular withdrawals – a process known as drawdown. Provided these investments continue to appreciate in value, this approach should result in a more comfortable retirement. But it does mean that people in retirement need to keep their finances under regular review.

Maintaining your capital and income

If you are using a drawdown scheme, a balance needs to be struck so you take enough income to live on but not so much that your money runs out when you are older. As well as choosing the appropriate amount to withdraw every month, it is also important to ensure the risk level in your portfolio is suitable. If you take too much risk, the value of your fund could become too volatile – at least over some short-term periods – for you to take a dependable income. But if you take too little risk, especially in the early stages, your investments are less likely to grow at a strong enough rate to fully fund your retirement.

Talk to your independent financial adviser or wealth manager on a regular basis to make sure that your pension savings are on course to meet your requirements and personal circumstances. And bear in mind also that it may be prudent to reduce the risk in your fund gradually over time.

The value of a guaranteed income

Given that most people will be retired for two decades or more, it makes sense to continue investing – and benefiting from asset growth – after you start taking a pension income. This is the main reason the government has made it easier for people to use drawdown schemes.

But there is a lot to be said for having some level of guaranteed monthly income to fall back on as well. Your state pension entitlement will form part of this, but as you get older it could be worth considering using some of your capital to buy an annuity. Low rates and the fact that younger people get lower annuity pay-outs mean that it might not be a good idea to sign up at age 60 or 65. But an annuity will have more to offer once you turn 70 or 75, say. It is important to shop around for the most suitable annuity, not just in terms of the rate but also the type: enhanced annuities, for example, offer higher pay-outs to customers with serious health problems. A joint annuity, on the other hand, will pay less than a standard deal but will ensure that your spouse continues to receive a fixed income after your death.

Inheritance planning

Now is also a good time to think about what inheritance you wish leave your partner and family members – as well as what level of inheritance tax they will face on any bequests. The standard inheritance tax rate is 40%, charged on the part of your ‘estate’ that is above the tax-free allowance – currently set at £325,000. However, if you leave property to a family member, you are allowed to transfer an additional £150,000 tax-free in the current tax year (rising to £175,000 from April 2020). Any surviving partner is allowed to use both tax-free allowances.

There may be steps you can take immediately to minimise the size of your estate for tax purposes. For example, any financial gifts above £3,000 a year that you make to relatives will fall outside your estate provided you live for at least seven years afterwards and can help reduce the eventual inheritance tax bills they may face. If you live for less than seven years post-gift, inheritance tax will be charged on a sliding scale (ie, at 32% if you live for three to four years; 24% if you live for four to five years etc).

Ensure that your will is up-to-date and that the beneficiary details on any investments are correct. And while it is unlikely to be a pleasant topic, think also about planning your funeral. Preparatory steps such as these can relieve your family of a significant burden at a difficult time.

Important information: Columbia Threadneedle Investments does not give investment advice. If you are in any doubt about the suitability of any investment, you should speak to your financial adviser. Data as at 30 September 2019 unless otherwise specified. Past performance is not a guide to future performance. The value of investments and any income is not guaranteed and can go down as well as up and may be affected by exchange rate fluctuations. This means that an investor may not get back the amount invested. Your capital is at Risk. The analysis included in this document has been produced by Columbia Threadneedle Investments for its own investment management activities, may have been acted upon prior to publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice and should not be seen as investment advice. Information obtained from external sources is believed to be reliable, but its accuracy or completeness cannot be guaranteed. The mention of any specific shares or bonds should not be taken as a recommendation to deal. Issued by Threadneedle Asset Management Limited. Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority. Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies. columbiathreadneedle.com

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