Richard Alexander (Columnist)
AS many of you know, new legislation this April will bring the greatest flexibility ever known in UK pension schemes and how money your can be extracted.
Ignoring the hot air and rhetoric from political parties about irresponsible behaviour with the pension pot, what this means for most people, is a much greater degree of flexibility in retirement planning.
Previously, retirement income was expected from two sources; the State pension and any private or employer pension schemes. These retirement funds would traditionally be used to purchase an annuity, guaranteeing income for life.
These days, however, this rather simplistic view is outdated and for many, we see a real need for holistic retirement planning, which may call upon many other assets to contribute to retirement income.
Whether you have savings in the bank, insurance bonds, stocks and shares, Unit Trusts, equity in your home or money under the mattress, if you planning how to fund your retirement, you really need to know where your decisions are likely to take you and whether in fact, you will have enough money to support you for the rest of your life.
Some insurance companies and other product providers are experimenting with software systems to plot future income needs, some even making allowance for life expectancy based on post codes and how this might impact on the long term finances of individuals.
Clearly, if we knew how long would live, we could plan our long term finances with precision, but thankfully, that is a piece of information not available to the majority of us and yet, it is an important factor to bear in mind.
I believe it is more important to understand what a financial decision made today – perhaps in terms of the level of income to be taken from capital – is likely to mean in the long term and which variable factors may affect those plans.
For my clients who have multiple sources of capital and income, I have created an evolving spreadsheet-based solution, which captures all sources of capital and income and enables us to make some assumptions in terms of the level of return that is likely on each type of investment – and what the long term impact of extracting money in the form of income will be.
This is designed to show trends over a 10 year period and enables individuals to understand the relationship between investment performance, inflation, income and other factors which will impact their ability to maintain income in the longer term.
Unless you are determined to leave a large nest egg for the next generation, erosion of capital is not necessarily a problem, as long as you are in control and know where your financial decisions are likely to take you.
