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How advisers can help you take Income Drawdown tax efficiently

Drawdown is almost always a balancing act between mitigating risk, receiving returns and retaining some flexibility.

A successful drawdown strategy involves the ongoing and effective management of any number of client risks.

Establishing attitude to risk and capacity for loss, in essence this is about helping clients understand the greater risks associated with drawing down retirement portfolios, compared with the accumulation stage, including:

  • Sequence of returns risk (also known as reverse pound cost averaging) – this is where withdrawals during a market downturn can lead to a rapid reduction in the value of a fund.
  • Volatility drag – the risk inherent where a portfolio falls in value and then needs to work harder to go back to it’s start value.
  • Inflation risk – helping the client appreciate how long their portfolio might need to last and a considered view on the impact of inflation (for example, 2.5% inflation reduces real income by half over a 20 year period).
  • Longevity risk – an assessment of average life expectancy and helping clients understand the probability of living beyond this date.

Other things to consider;

  • Investment returns may be less than those shown on the illustrations
  • Annuity rates may be better or worse in the future
  • High levels of income may not be sustainable.

Consider what constitutes a Safe Withdrawal Rate (SWR).

Advisers can demonstrate value (and increase sustainability of income) is in respect of limiting tax on withdrawals.

Unless a pension provider holds an up-to-date tax code, lump sum withdrawals from a pension plan will be subject to income tax under the emergency rate basis. This will result in an overpayment of tax for the majority of individuals making their first withdrawal from their pension.

Whilst this overpaid tax can be reclaimed during the tax year using one of the new HMRC forms specifically designed for this purpose, consideration of strategies to avoid emergency tax including using phased income withdrawal when a large tax-free cash amount is not required is good practice where appropriate.

Consider the impact of the Lifetime Allowance, both on withdrawals and at age 75 on remaining benefits.

Things you might want considered in a Review;

  1. Are your plans meeting the stated objectives, priorities and expectations?
  2. Is your chosen level of income sustainable over the long term?
  3. Is your investment strategy still suitable?

Other important questions to be asked include amongst others:

  • How will your health affect the review and outcomes?
  • Are your objectives still realistic?
  • Has your capacity for loss/attitude to risk changed?
  • How are any changes to strategy and investment portfolio identified and implemented?
  • How do you decide if the time has come to consider a partial, phased or full exit from one of your drawdown plans?
  • Is it clear your minimum income requirements are still being met?
  • Have your cognitive abilities deteriorated?
  • Power of Attorney in place?
  • Review of the nomination/expression of wish every annual review and following each key life event.
  • Changes in legislation?

Build contingency built in to all retirement planning, and make sure there is sufficient provision to cover unforeseen problems (such as a major stock market crash, significant unexpected capital expenditure or the death of a partner). Agreeing to a plan of action in advance will enable a speedier response.

Hope this helps!

IF YOU NEED INVESTMENT ADVICE PLEASE CONTACT AUTHOR Elliott Wilson ACSI DipPFS AF3

 

While we keep information on the website as up to date and as accurate as possible, the information on this website does not form part of our advice process. Cambridge Pensions Ltd cannot accept any liability for any decisions made by a client or member of the general public based on any information contained on this website. The value of your investments can go down as well as up and you may get back less than has been paid in.

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