Pension Advice come April

philwal wrote: »

I have a sizeable pension pot approx 270K and am unsure with all the changes come April what my options are I am 60 and feel that I would need to maybe start drawing my pension to top up my salary.

Easy to do that from 6 April 2015:

1. You can just say you want some money as an Uncrystallised Funds Pension Lump Sum (UFPLS). 25% of this will be tax free, the rest will be taxed as normal income.

2. You can place your money or part of it into Flexi-access Drawdown. When doing this you can (should!) take 25% of the portion put into drawdown as a tax free lump sum. Then you can take money from the rest whenever you like, added to your normal taxable income. For the tax free lump sum one good thing to do is put it into a S& ISA as rapidly as the annual limit allows, then draw an income from it tax free.

You need to make the same investment decisions as you have been making before reaching 60, with an added focus on making sure that you don't draw too much when markets are down, particularly if you are drawing more than 4%. How much you can take sustainably varies. 4% increasing with inflation is often given as a number but if you're willing to take more care and adjust income in response to market conditions 5% or even 6% using US investment returns has been shown to be possible with almost 90% success rate.

There are some theoretically proven techniques you can use to improve income levels and reduce risk levels during drawdown:

A. The Guyton or Guyton and Klinger safeguards. The two additional safety rules are:

1. "there is no increase in withdrawals following a year in which the portfolio’s total investment return is negative, and there is no make-up for a missed increase in any subsequent year"
2. "the maximum inflationary increase in any given year is 6 percent, and there is no make-up for a capped inflation adjustment in any subsequent year"

B. Keeping one year of planned investment income in cash to draw on when markets are down. One easy way to do this is to place the money into a savings account and have the natural income top it up, using capital sales to top it up more as require when markets are not down.

C. Being willing to borrow, with one study showing substantial increases in drawdown capability using equity release products that allow drawing and repaying money as desired. This is done when markets are down, again to avoid selling investments during market lows. In the ending years of life it also provides protection from income if funds run low. This is the Reversing the Conventional Wisdom: Using Home Equity to Supplement Retirement Income method.

Using all of these rules and practices is likely to increase the 90% success rate drawdown income level to 6.5% or so instead of 4%, with the study in C showing that the A and C rules combined increased it to 6.5% with almost 90% success rate for US investors.

Some care needs to be used because these are US studies, using US investment returns. 6.5% increasing with inflation is probably a bit too high for comfort unless you are wiling to accept the chance of significantly lower income alter in a long life and poor investment returns case.

philwal wrote: »

Is the best way to take an annuity ?

No. At normal retirement ages standard annuities is usually a mistake that greatly reduces your income. If you need a guaranteed income for life the cheapest way to get it is usually to defer claiming the state pension. This will increase your state pension by 5.8% for each year of deferral, pro-rated for shorter periods. Those reaching state pension age before the flat rate come in get a better deal, 10.4% increase. All inflation-linked and with some inheritance of part of the increase by a spouse. No annuity on the open market can beat these terms.

The main exception where an annuity can be appropriate is if your life expectancy is seriously impaired. Then an "enhanced annuity" might pay you more than deferring the state pension.

greenglide wrote: »

the extra pension for deferral is not inheritable should pre - decease a spouse / civil partner.

Why not inheritable, given the contents of the leaflet describing how much is inherited on page 33?