Not many people fantasize about the letter they will get from their workplace pension provider when they get to the point they can start spending their hard- saved earnings.
As I made my way around Studland Bay, Old Harry Rocks and the beautiful woods of the Purbeck hills, I mused in sub-Wordsworthian fashion about how I’d like to hear the news that after a lifetime’s toil, I could now start to wind down.
Whether the time for the letter is my 55th or 67th birthday (my state retirement age, my choices are similar – more work – more saving- cheaper lifestyle! I know whatever I’ve saved in 3 years time will not be enough to secure my and my family’s future.
So this is the letter I came up with in my head
Though we haven’t met, I and my colleagues have been looking after your retirement savings these past few years. I hope you think, we’ve done a good job, you’ve certainly done yours.
When I looked yesterday, you’d saved £1m.
In a few months time you’ll be 55 and this letter’s a wake up call telling you what choices you have ahead of you. You can take this letter with you to your Guidance meeting which the Government are setting up for you. Whoever you meet there will be able to answer your questions face to face.
You can do nothing – leave your money with us and let the fund roll-up
I’m sure you’ll be pleased to know that you don’t do anything at all, your money can continue to be invested. Because you haven’t made any investment decisions, you’re leaving it up to us, we’ll be investing your money to increase your savings but we’ve turned down the risk button from where it used to be, your returns will be a little less, but we hope we’ve cut out nasty surprises (the last thing you need when you start drawing your money).
You can spend your pension savings and keep the money with us
You can carry on building up money as long as you like and of course you can continue to put money into your funds. But there may be a time when you start drawing cash into your bank account. Again, you don’t have to take any decisions, just tell us what you want and when you want it and you can take money out of your pension savings as if it were a bank account.
You can choose to draw a little every month (as if you were being paid) , take big chunks from time to time or do a bit of both. There are tax consequences for doing this. Some of your money can be drawn tax free, some may be taxable but will fall within your tax exemptions and some will be taxable at your highest rate of tax. Worse than that , paying yourself from your pension may push you into a higher tax-bracket. So take care how you do all this and speak to an adviser if you need help (see later in this letter
Or you can do something totally different!
But this is me being a little presumptious. You don’t have to keep your money with us and you certainly should look at alternatives.
You can guarantee your income for life with an annuity.
In the old days, people like you invested your savings in a guaranteed annuity which paid out a fixed sum for as long as you lived. Sometimes longer- as you could choose for it to pay to your partner if he or she outlived you.
Annuities have fallen out of favour recently because of the low amount of income they offer. Many people who value the guarantees of income are choosing to defer buying an annuity till later in life so that they can benefit from the returns from the market in the meantime.
But that doesn’t mean you can’t buy an annuity today; if you do want to explore this option, please don’t take the first annuity that comes your way, make sure you get your health checked out- this is one time when being unhealthy gets you more! Make sure you get the best rate on the market by using a market-leading adviser.
You can switch your savings to someone else.
I’d be lying if I said I wanted you to do this, but I know we’re not the only organisation offering to manage your retirement income for you. Many of our competitors will allow you to transfer your savings to them and they’ll try to do what we try to do.
You can join a Defined Ambition pension scheme
There are specialist providers who offer collective retirement plans which work a little like the old company pensions. You join a pool of people all of whom are drawing down incomes against their individual pension pots. But these kind of arrangements provide you with extra protection against you living too long by using the leftover funds from those who die early to boost the funds who live longest. It’s macabre to explain it as a death club- but that’s what it is! These arrangements are called Defined Ambition because they aspire to do what company pensions did and provide you with insurance against you living too long without you having to buy an annuity.
You can “Cash-out!” and do what you like with your savings
You can draw all the money out of your pension, pay lots of tax and use the rest to have a good time. There’s nothing wrong in doing this. If you hate the idea of anyone having anything to do with your money but you, then draw the money in used fivers and stick it under the mattress!
You may have to pay quite a lot of tax if you take your money all at once but don’t let this stop you, the more tax you pay, the less tax I pay!
Of course most people won’t do that and you may already have plans for what you’ll do with your pension cash. Whether that’s to buy a property, set up a business or just get yourself a decent lifestyle (till the money runs out), the choice is yours and neither I , nor anyone else , is going to stop you going down this road.
You may want to take advice
I’ve mentioned earlier that the Government is going to offer you some guidance for free. Guidance can explain your options but stops short of telling you what is best for you.
If you want to be told what to do, you need to pay for financial advice.
Taking private advice is like taking private medical care of going to a private teacher. It’s not essential , but if you have the money- and you do- it’s worth thinking about.
A lot of the options mentioned in this note, are quite hard to research as an individual. Things can go badly wrong if you mess up on tax, have to pay unnecessary charges or choose an unsuitable option for you.
If you feel you need more help, you can choose to pay money to a qualified financial adviser who will look at things in more detail and help you choose your best option in the light of your particular circumstances.
Personally I am going to use an adviser as I don’t want to make any decision about how I get paid for the rest of my life without some help! I ‘m thinking about my health, my grandkids, the possibility of my having to go into a home and I’m thinking about how long I’m likely to live.
My adviser will look at all my options, tell me my best annuity rate, look at Defined Ambition plans with me, explain what rival organisations to mine can offer and help me understand the costs I might incur if I had a long terminal illness.
A word of warning
The more you do with your money, the more risk there is of things going wrong. If you want to do something clever- please check it out with an adviser- you can easily lose money through buying and selling investments. People don’t often realise that the costs of buying a house (fees, stamp duty and commissions) are also payable on buying and selling shares and other financial products.
I say this to people bringing their money to us from somewhere else and I’ll say it to you (who’ve got your money with us), moving money around for the sake of a good deal is a risky thing to do.
It’s best to invest time and be cautious than have to move your money around. And don’t be suckered into thinking that anyone benefits from churning your investments other than the people who do the churning!
A final word
So that’s it from me. I hope that you enjoyed reading this note. I know we don’t know each other and sadly I doubt we ever will. Nonetheless, I’d like to thank you personally for investing with my company.
Enjoy your guidance session, take advice if need be, don’t be suckered into doing anything you don’t feel sure about and remember, if all else fails, we will be your backstop, pay your pension how you choose and continue to invest your money.
Chief Executive Officer (BSD- with knobs on)