Retirement Your - Alliance Trust...Contents Welcome Alliance Trust Savings Limited PO Box 164 8 West Marketgait Dundee DD1 9YP Tel +44 (0)1382 573737 Fax +44 (0)1382 321183 [email protected]

Your

For life after workRetirement

Expert views on how to generate income for, and in, retirement

Passing on wealth to your loved ones

Simple strategies to achieve the future you want

Issue 4

Contents

Welcome

Alliance Trust Savings Limited

PO Box 1648 West MarketgaitDundee DD1 9YP

Tel +44 (0)1382 573737Fax +44 (0)1382 [email protected]

A BRIGHT FINANCIAL FUTURE IS SOMETHING TO LOOK FORWARD TO, BUT IT WON’T HAPPEN BY LUCK.

YOUR RETIREMENT IS HERE TO HELP YOU PLAN AND ENJOY A FULFILLING LIFE AFTER WORK.

This issue looks at life after work in its broadest financial sense. What’s involved in supporting yourself and – if it’s your wish – passing wealth to the next generation. You now have a great deal of flexibility in later life,

especially when it comes to your pension.

We explore how a sensible drawdown strategy can be constructed from your retirement savings. What is a realistic income level to target? For most people, life after work – or even life with less work – is a marathon, not a sprint and there are dangers in shooting out of the blocks too quickly.

A desire to pass on wealth is one reason some people may consider transferring from defined benefit to defined contribution pension schemes. However, defined benefit schemes confer valuable benefits, so we look at the pros and cons of this option on page 16.

Pensions typically sit outside the taxable estate for inheritance tax purposes, so when it comes to inheritance planning, it’s very important that you make use of the often overlooked Expression of Wish form. We review how crucial it is for ensuring that your pension goes to the right people.

These are interesting times. Low interest rates may make it a challenge to achieve a sustainable income, but on the other hand, many opportunities come with flexibility and choice. A little planning for your future and that of your loved ones can go a long way.

Past performance is not a guide to future performance. The value of investments can go down in value as well as up and you may get back less than you invest. Tax rules can change at any time and the value of any benefits depends on individual circumstances. If you are unsure of the suitability, please speak with an Adviser. Alliance Trust Savings cannot provide advice. The articles in this magazine from fund managers have been paid for, and as such Alliance Trust Savings do not have editorial control of the content and may not share their views. These are designed to help investors make their own investment decisions. They do not constitute a personal recommendation to invest. If you have any doubts as to their suitability you should seek expert advice.

04 Best of both worlds? Is it possible to have a full retirement and leave a

meaningful pot for the next generation? We think so.

06 Life after work: in numbers From sources of wealth to how much you might spend

and save. Prepare to be surprised.

08 A marathon not a sprint You’re planning a long and happy life after work. What

does it take to make sure you don’t outlive your money?

10 Passing on your pension Your pension can form an important part of inheritance

tax planning. Find out how.

12 Wishing well Why your pensions Expression of Wish form is one of the

most important documents you’ll ever complete.

14 Think big Saving for life after work is about so much more than your

pension. From tax allowances to your ISA and home.

16 Tempted to transfer? Why some people are prepared to contemplate a move

from the pensions gold standard – defined benefit schemes.

18 Time to harmonise your pension pots? With an average of 11 jobs during our pension careers,

can you keep track? Or is it time to consolidate?

19 Reader request: Trivial pensions At reader Stephen’s request, we look at what to do

about small pension pots.

20 Your checklist for life after work The world is your oyster, so it’s time for action. Our

checklist for planning a rewarding life after work.

22 We are all actuaries now Gregg McClymont of Aberdeen Asset Management throws

down the gauntlet. Time to unleash your inner actuary.

24 Planning a sustainable retirement Steven Andrew of M&G looks at some common pitfalls,

and suggests some practical solutions for avoiding them.

26 Rising to the income challenge John Spedding of Schroders looks at the options for

making your retirement income last.

04 20

2410

Sara Wilson Head of Platform Proposition Alliance Trust Savings

4 | Your Retirement | Issue 4 Your Retirement | Issue 4 | 5

Best of both worlds?WHILE SPENDING THE KIDS’ INHERITANCE HAS BECOME A BYWORD FOR THE HECTIC ACTIVITIES OF RECENTLY-RETIRED BABY-BOOMERS, MOST STILL WANT TO LEAVE A LEGACY. NOT LEAST BECAUSE THEY REALISE THAT THEIR CHILDREN MAY NEVER GET ON THE HOUSING LADDER OR RETIRE IF THEY DON’T. BUT IS IT POSSIBLE TO HAVE A FULL RETIREMENT AND LEAVE A MEANINGFUL POT FOR THE NEXT GENERATION?

Housing wealthOn the ‘yes’ side of the argument, housing wealth is a key factor. The housing market may have cooled as buyers digest the likely impact of Brexit, but the price rises of recent years have not been reversed. Considerable wealth resides in UK housing stock. This is at least partly responsible for the £6.2bn in Inheritance Tax the Treasury now expects to be collecting by 2021/221.

More people can now pass on housing wealth tax-free following the introduction of an extended nil rate band for your main home.

Initially set this tax year (2017/18) at £100,000, rising to £175,000 by 2020/21, added to the existing nil rate band of £325,000 this means the tax-free limit for passing on your home to direct descendants will eventually be £500,000. For married or civil partners, who benefit from the ability to transfer their nil-rate bands to the survivor on death, this can add up to £1 million.

Pensions flexibilityPensions flexibility is also a bonus. When buying a guaranteed income (an annuity) was still the default retirement option, passing on pension wealth was difficult. But now the rules have changed. It is both easy and tax efficient to pass on a drawdown pension. Money in pensions will normally not form part of your estate for inheritance tax and is only taxed in the hands of the beneficiary if the pension owner dies after aged 75. This gives lots of tax planning options.

Longer livesOn the ‘no’ side of the argument, we’re all living longer and this has a bearing on how much wealth you might have left to pass on. In England, life expectancy for men aged 65 years is currently 18.8 years; for women it rises to 21.2 years. The UK has 14,570 centenarians2.

Care home fees could also be a threat to your ability to have a wealthy retirement and leave something for your loved ones. At an eye-watering £29,270 a year for residential care (rising to over £39,300 a year if nursing care is necessary)3, this is more than most people will be able to pay through their pension alone. As it stands, those going into care will be expected to meet the full costs if they have money or property over £23,250.

Good planningGood planning can help you maximise the potential upsides and manage the potential downsides. First and most important is to have a clear sense of your long-term goals and understanding of what you need your money to achieve. What type of retirement would you like? Do you want to continue working for 2/3 days a week? Do you want to travel? Move house? Support your children?

It is important to understand how much you would like to pass on to the next generation, but also the extent to which it is a priority. Would you sacrifice a comfortable retirement to do so?

This allows you – and your financial adviser if you have one – to understand what you need to achieve and work out how you’re going to get there. Do you need to save more? Retire later? Cut back on spending? It is always worth addressing these issues early – at age 40 you still have time to shoot for the sort of life after work you want. Once you get to your 60s it may be too late.

It’s in your handsOnce set, having clear goals also helps you keep track of how close you are to hitting your target. It can also put short-term market volatility into context. Rather than just panicking about a sell-off in the stock market, you’ll be able to understand what it might mean for you financially and how to get back on track – it may only mean working a few months longer or saving a little more each month.

It will also make it easier to see how much you can give away. This remains an effective way to minimise inheritance tax. You have an annual £3,000 allowance, and this can be carried forward into the following year if it is unused. Larger transfers are also allowed, but are deemed ‘potentially exempt transfers’ – they are free from tax providing the donor survives for seven years.

So yes, it is possible to have a comfortable and fulfilling life after work and pass money onto the next generation, but it’s unlikely to happen accidentally. Your future is in your hands and it starts with taking control and having a clear view of your priorities and goals.

You never know, your children might even thank you one day.

Past performance is not a guide to future performance. The value of investments can go down in value as well as up and you may get back less than you invest. Tax rules can change at any time and the value of any benefits depends on individual circumstances. If you are unsure of the suitability, please speak with an Adviser. Alliance Trust Savings cannot provide advice.

Sources:1. Spring Budget 2017.

2. Office for National Statistics, Life Expectancy at Birth and at Age 65 by Local Areas in England and Wales, 4 November 2015 and Estimates of the very old (including centenarians), UK: 2002 to 2015, 29 September 2016.

3. PayingForCare, based on the Laing & Buisson Care of Older People UK Market Report 2014/15.

We dedicated Issue 3 of Your Retirement to the critical process of goal setting. Still available to read at alliancetrustsavings.co.uk

Those households now expecting

to leave an inheritance.9

HAVE YOU GOT A HANDLE ON ALL YOUR POSSIBLE SOURCES OF INCOME? HOW MUCH DO YOU REALLY NEED IN RETIREMENT? IS IT MORE OR IS IT LESS THAN YOU CURRENTLY THINK? WHAT ARE SOME OF THE CHALLENGES YOU MIGHT FACE? HERE WE SURVEY THE STATISTICS. AND SOME MAY COME AS A SURPRISE.


Life after work: In numbers

Sources:1. Department for Work and Pensions, Pensions Latest blog, 10 May 20162. A survey by Partnership, as reported by Tanya Jeffries at www.thisismoney.co.uk, 5 Mar 20153. Saga, A quarter of a million over 50s have found relatives hidden share certificates, 22 Feb 20164. Prudential, Retirement debt on the rise again, 17 Feb 20175. HMRC ISA Statistics at Aug 20166. ONS, as reported in The Guardian by Julia Kollewe, 22 Mar 20177. Tilney, The cost of tomorrow: forecasting our future spending, Edition 1 – Feb 20178. ILC UK, Understanding retirement journeys: Expectations vs reality, Nov 20159. Institute for Fiscal Studies, press release, 5 Jan 201710. YouGov general population tracker survey for the Legal Services Consumer Panel, 16 Nov 201611. Old Mutual Wealth, Retirement Income Uncovered, Aug 2016

Keeping up with work and private pensions 1

ISA nest eggs 5

Share surprises 3

Spending after work 7

Still in debt? 4

Continuing to work 6

Qualifying for the state pension 2

The average number of jobs people have in

their working lives.

of women in the 40-65 age group estimated in 2015 not likely to

have enough NI contributions to receive the full state pension.

The number of Adult ISA accounts subscribed to in 2015/16.

Increase in women working past traditional retirement age between 2012 and 2016.

The total market value of UK adult ISA savings at the end of 2015/16.

Percentage of men still in employment at the age of 70.

The average ISA savings of the median ISA holder by income at the end of 2013/14.

The average ISA savings of an ISA holder with an income of £150,000

or more at the end of 2013/14.

The equivalent percentage for men.

4 in 5 people estimated to lose track of one or

more pensions.

1 in 7 over 50s hold paper share certificates.

Amount by which pre-retirees on average underestimate

their future spending.

Expected spending per year in retirement.

Projected versus actual spending through a 20-year retirement.

1 in 4 people planning to retire this year still have debts.

over 50s have found relatives’ hidden share certificates.

Their average debt.

The average value of paper share certificates held by over 50s.

In unclaimed private pension savings.

11

39%

12.7m

5.6% to11.3%

£518bn

15.5%

£19,538

£64,148

14%

£100k £19,456

£325k vs £420k

250,000

£24,000

£3,500

£400m

Changes as you age 8 Wealth, and passing it on

The amount less spent on average by a household

headed by someone aged 80 and over, compared to a household headed by

someone aged 50.

Increase in wealth of elderly households

between 2002/03 and 2012/13.9

of people haven’t made a will. 10

of people haven’t discussed their plans for the inheritance

they will leave behind with those who

stand to benefit.11

The estimated amount that individuals aged 80 and

over are saving each year.

43% 45%

63%

72%

52%£5,870

A marathon not a sprintTHE KEY TO LONG-DISTANCE RUNNING IS TO START OFF AT A REASONABLE PACE. YOU THEN LEAVE ENOUGH IN RESERVE FOR THOSE HARDER FINAL MILES. THE WORST THING IS TO START OFF TOO QUICKLY AND LEAVE YOURSELF GASPING AT THE HALFWAY MARK. HOW YOU DO IS ALL IN THE PREPARATION AND TRAINING.


For those gearing up for life after work, drawing down on a pot of retirement savings is becoming increasingly popular as an alternative to buying a guaranteed income for life, but

it raises an important question. How much can you realistically draw from your pot while making sure that you don’t run out of money? This is particularly pertinent in today’s low interest rate world, where it’s often necessary to take higher risks to have a chance of achieving the sort of income you might like.

Pound cost ravagingUnderpinning this is the concept of ‘pound cost ravaging’.

A drawdown portfolio of bonds and equities may generate a natural income of, say, 3%, or £3,000 per year on a pot of £100,000 in the form of interest and dividend payments. If a retiree wants to drawdown more than this, say £6,000 a year, they’ll have to reduce the capital value of their pot to do that, by £3,000 in the first year of this example.

This means that the next year they only have £97,000 in the pot. Income at 3% on that is now only £2,910, rather than £3,000, so the impact of taking another £6,000 out becomes even greater. Magnify this phenomenon over years and years, and your pension pot may not last the distance.

This of course, is a basic example, and assumes that there is no capital appreciation (or depreciation) of the bonds and equities in the portfolio, but it illustrates the risks of drawing too much money from your pot. You may not initially see this as a problem if you don’t plan to leave a legacy, but it could end up being one in practice if your particular marathon means you outlive your pot.

Taking regular withdrawals at too high a rate as markets are falling exacerbates the pound cost ravaging effect. Why? Because it means you must sell more units of your investment to achieve the same drawdown income. And the fewer units left in your pot, the harder it is for that pot to recover.

Pound cost ravaging is the opposite of pound cost averaging, which is what happens when you buy investments regularly at different prices. In this scenario, whilst you are still building up your pot, you buy more for the same money when prices are low, and so benefit more if they rise.

The Government used to place a limit on the amount that could be taken from a drawdown portfolio to prevent retirees starting their marathon at a sprint. The maximum amount of income you could take during a ‘pension year’ was 150% of the Government Actuary’s Department relevant annuity. But, this requirement was scrapped in 2015 and you can now take as much or as little as you like.

A realistic levelSo what is a realistic level for drawdown income? Looking at some of the general research available to advisers who specialise in this area, a study of US data from the 1990s suggested that 4% was a realistic level to draw from a pot to last out a 30 year retirement without running out of capital 1.

However, recently this has been called into question.

In 2010, another study put the rate based on UK data at 3.77%, rising to 4.17% if you were prepared to accept a 10% probability of failure 2. And further research published in January this year 3 pointed out not just that much of the historic analysis was based on US data, but that it also incorporates periods such as the technology bubble, which distort the long-term returns of stock markets, and periods when interest rates were far higher than they are today.

The January research suggests that for a 30 year retirement, a sustainable income is 3.23%. This gives a 95% probability of ‘success’, where success means not running out of money. However, for someone living 35 years into retirement, the sustainable income rate moves to 2.93%.

A 30 to 35 year time horizon for life after work may be longer than most of us need to worry about, and your personal circumstances, goals and objectives may mean a higher

drawdown rate could be realistic for you. But these figures do give food for thought.

Where do you start when it comes to your personal circumstances?

1. Do you need advice?

Do you feel able to make key decisions about funding your life after work on your own? Your money may need to last a long time and retirement income is difficult to rebuild once lost. An investment in professional financial advice may make sense at this stage.

2. Be clear on your needs

How much money will you need to support your life after work and any plans for passing on wealth? An honest appraisal of your current and projected spending is essential. Along with a sound understanding of the type of retirement you would like to have, how much you want to leave to your family, and the balance between the two.

Pound cost ravaging and your pension pot

3. Build a robust, diversified portfolio

With this understanding, it is possible to build an appropriate portfolio. In this, a planning session with a professional financial adviser can really help. For many investors a well-diversified multi-asset portfolio, comprising government bonds, domestic and overseas stocks, plus some cash and property may be the appropriate option. However, the blend will vary depending on how much risk you are willing to take with your investments.

For example, if you have other assets to support you in retirement, you may be able to hold more in the stock market. This type of investment is likely to see more variation in capital values, and so may expose you more to the risk of pound cost ravaging. However – although you should always remember that past performance is not a guide to future performance – it has delivered higher returns over the longer-term, ahead of inflation.

Sources:1. William P. Bengen’s

Determining Withdrawal Rates Using Historical Data, Journal of Financial Planning, October 1994 is perhaps the best known and most quoted.

2. Wade D Pfau, An international Perspective on Safe Withdrawal Rates from Retirement Savings: The demise of the 4 Percent Rule? September 2010.

3. Aegon, What’s the new sustainable income rate in retirement? January 2017.

£3,000 Minus£6,000 Minus

£6,000 Minus£6,000 Minus

£6,000

£100,000 £97,000 £93,910 £90,727 £87,449

£2,910

£2,817

£2,722

£2,623

Capital value Natural income Drawdown amount


ExceptionsPensions are never straightforward and there are exceptions to the rules that mean your beneficiaries will have to pay tax if you die under 75. These include:

• They are paid the money more than 2 years after the pension provider is told of your death.

• You had pension savings worth more than £1 million.

Making the most of the opportunityWe’ve seen that a pension pot can now be passed to children and grandchildren largely tax free, potentially giving them a significant financial boost. If that’s of interest to you it may affect how you choose to manage your retirement savings. For example, rather than drawing down money from your pension pot in the early years of your life after work, would it make more sense to rely on other assets first? ISA savings for example?

These days, saving for life after work is about more than just pensions. We delve into the detail in Think big on page 14.

Using an Expression of Wishes to best advantageJohn Michaels is 78, with a substantial drawdown pension portfolio. He has a wife, aged 73, two children in their late 40s and three grandchildren. His wife is a basic rate taxpayer, the children higher rate tax payers and the grandchildren non-tax payers.

Mr Michaels knows that his wife will need some funds to live on when he dies, but probably not the entire drawdown pot. However, he realises that, as he is over 75, his grown-up children would pay higher rate tax on any income they received from his pension. So he changes his Expression of Wish form asking to leave 70% of the fund to his wife and 10% to each of his grandchildren.

When he dies, under current rules this means no inheritance tax should be payable; and provided the trustees of his pension scheme are prepared to go along with his wishes, his wife can continue to draw an income from the drawdown portfolio left to her, still paying basic rate tax, while his grandchildren will potentially pay no tax on their portion of the money at all.


Any remaining pension funds left on death used to be subject to a chunky 55% tax in the hands of

the beneficiary – 55p out of every pound with no nil rate band. Most retirees rightly concluded that they were better off spending it, leaving other assets to their families that would at least be exempt up to the £325,000 nil rate band and only subject to tax at 40% thereafter.

This punitive, automatic 55% tax charge on death was abolished amid the raft of pension freedoms introduced by George Osborne during his time as Chancellor.

Money left in your pension potAny money left when you die can be passed on as a lump sum or income to beneficiaries.

In either case, other than in certain specific circumstances, the money is now only taxable in the hands of your beneficiaries if you die after age 75. At this point, it becomes subject to income tax at your beneficiary’s marginal rate.

This means it can be particularly tax efficient to pass it to those who would otherwise have a low rate of tax, such as children, rather than those already paying tax at either 40% or 45%.

Beneficiaries don’t usually pay inheritance tax on money from a pension pot because payment is usually discretionary. The pension provider chooses whether to pay it to them based on what you told them in your Expression of Wish form. But they don’t have to. We take a closer look at this issue in Wishing well on page 12.

If you were receiving a guaranteed income for lifeThe tax treatment of annuities is little changed under the new rules, largely because you exchanged your pot for a lifetime income, so there is nothing left to inherit.

The only circumstances in which part of the pot can be passed on is if you have chosen value protection, joint life or a guarantee period.

Value protection returns a lump sum if you die without having received the full value of your pension fund. A joint life policy pays out to a second person on your death, though usually only a share of the original income. The final option is to agree a guaranteed period over which your annuity will be paid, regardless of whether you die within that period.

In all these cases, the tax treatment is similar. If you die before 75, the income or lump sum is tax free in the hands of your beneficiary. If you die after 75, it is taxed at their marginal rate of tax.

Passing on your pensionIT’S ALWAYS BEEN THE CASE THAT PENSIONS TYPICALLY SIT OUTSIDE A PERSON’S ESTATE FOR INHERITANCE TAX PURPOSES. HOWEVER, IT USED TO BE THAT THEY WERE TAXED SO PUNITIVELY IN THE HANDS OF ANY BENEFICIARIES THAT MOST RETIREES WORKED ON A ‘USE IT OR LOSE IT’ POLICY. THAT ALL CHANGED IN 2015, AND NOW PENSIONS CAN FORM AN IMPORTANT PART OF INHERITANCE TAX PLANNING.

CASE STUDY


IN THEORY, YOU CAN PASS ON YOUR PENSION TO ANYONE FROM YOUR CHILDREN, TO A NEIGHBOUR TO THE LOCAL PET SHELTER. HOWEVER, NO MATTER HOW OBVIOUS IT MAY SEEM TO YOU, YOU SHOULD NEVER ASSUME YOUR PENSION PROVIDER WILL AUTOMATICALLY KNOW WHERE YOU INTEND THE MONEY TO GO.


The consequences of not making your wishes known to your pension provider could range from heartache and hassle

for those you leave behind, to your heirs paying more tax than they need to. The best way to ensure your pension ends up in the hands of the right beneficiary is by using an ‘Expression of Wish’ form.

Filling in an Expression of Wish form for each pension you have, and keeping them up to date for any major changes in your life – like marriage, the birth of a child or a divorce – tells the trustees who you ideally want your pension to go to after you die. This can be one person or several people, family or friends, charities and other institutions. Your pension provider will be able to provide you with the relevant form.

A cautionary taleThe potential pitfalls of neglecting this form were highlighted by the recent court case of Denise Brewster, who was initially denied access to her partner Lenny’s public sector pension when he died.

They had lived together for 10 years, getting engaged just two days before his death. She had assumed he had nominated her to receive his pension, but the administrator said he hadn’t and refused to pay.

The case went through the courts, who after a lengthy process lasting several years, eventually found in Ms Brewster’s favour. The UK Supreme Court found that the rule – particular to Lenny’s scheme – stating that unmarried cohabiting partners have to be nominated by their pension scheme member partner in order to be eligible for a survivor’s pension was ‘discriminatory’ – married couples don’t have to complete them.

Looking after your loved onesThe Brewster case is likely to prompt changes to the rules around the inheritability of public sector pensions, and it acts as a timely reminder of why it is always worth making sure your ‘Expression of Wish’ form is up-to-date.

Many people will fill them out when they first take out a pension, but they need to be reviewed from time to time, particularly if your circumstances change. It is important to check the small print for any qualifying conditions relating to survivor’s pensions too, particularly on defined benefit (DB, or final salary) pensions.

Take the time to talk about itWhile it may be a difficult subject, it is worth talking to your family about what to expect from your pension – and their inheritance in general – when you die. It is possible to avoid a lot of wrangling if family members are clear on what they are likely to receive when you pass away.

Ultimately, ensuring your Expression of Wish form is up-to-date is one of the easiest ways to pass on your wealth.

Wishing well

Why Expression of Wish and not your Will?The clues are in the names. Your Will is an instruction by you as to what you want to happen with your assets after you die. An Expression of Wish is different. It is a request you are making to the trustees of your pension scheme which they can act on at their discretion. Money paid out from your pension to beneficiaries can only be exempt from Inheritance Tax if it is a discretionary payment.

Are you up-to-date?You can download the Expression of Wish form for the Alliance Trust Savings SIPP in the Pensions, forms and documents section at alliancetrustsavings.co.uk. We’ve recently improved the form so it’s now easier for you to give us more detailed wishes for your pension when you are gone.

Your Expression of Wish is one of the

easiest ways to ensure you decide how your wealth is passed on.



It seems winding down may no longer be the top priority for those reaching their 60s and 70s. More and more people are

still working, part-time hours at least, or even going self-employed.

According to the Office for National Statistics, in February 2017 there were 1.17 million workers in the UK over the age of 651. Of self-employed part time workers, 22% were over the age of 65 at the end of 2015, a significant rise from 14% in 20012.

Whether you are in the world traveller or grey worker and entrepreneur camps – or maybe even both – it’s likely achieving your goals isn’t just about your pension savings. That’s where thinking of the possibilities comes in, looking at your finances more holistically and making the most of all the main tools at your disposal to build up your total wealth for later life.

Make the most of ISAsAs people look beyond pensions, Individual Savings Accounts (ISAs) are an obvious choice to supplement retirement income. While a conventional ISA does not have any upfront tax advantages as pensions do, all income received is tax-free. This makes them an important tool in your life after work toolkit.

You may be able to use ISA savings to boost income while still working part time, for example, or having a chance at setting up that landscaping business you’ve always dreamed of.

This may let you defer the point at which you start drawing on your pension pots, giving them a chance to grow further (although, of course, they could go down in value too) for when you really need them. As we’ve seen in Passing on your pension (page 10) you might also want to keep them aside as part of your strategy for passing on wealth.

Did you know you can defer taking your state pension too? It will increase by 1%

for every 9 weeks you defer taking it. This works out as just under 5.8% for every full year. The extra amount is paid with your regular State Pension payment.

In 2017/18, those retiring on the full State Pension get £159.55 a week or £8,296.60 a year. By deferring for one year, this would increase their State Pension by £479 a year.

For the under 40s, the new lifetime ISA launched on 6 April. If you are under 40, you’ll be able to contribute up to £4,000 per year, and get a 25% government bonus on any contributions made before your 50th birthday – worth up to £1,000 a year. You need to use the money for your first home, or keep it in your pot until age 60. Otherwise you pay a 25% charge to take it out.

Worth bearing in mind for your passing on wealth strategy, it’s also now possible to leave an ISA to a spouse or civil partner free from tax. This potentially supports the argument that an ISA is suitable for leaving to a spouse or civil partner, while using a pension to leave money for children or other inheritors.

Don’t forget housing wealthYour home can also have an important role in your financial strategy for life after work. If you have a grown up family living independently, and want to unlock gains in the value of your home, downsizing is an obvious option. You could then invest the proceeds for future use, or put them to use right away to achieve one or more of your life goals.

Remember, a new residence nil rate band is also now available for Inheritance tax, available if you want to pass on your main residence to direct descendants such as children and grandchildren.

The new rate band is being phased in, starting at £100,000 this year, rising to £175,000 from April 2020. At this point, coupled with the £325,000 standard nil rate band, a couple could give away a residence worth £1 million free of tax. If you don’t intend spending your housing wealth, but instead passing it on, it is definitely worth planning to ensure that this allowance is used.

Think bigDO YOU THINK ABOUT RETIREMENT AS A FIXED POINT IN TIME; THAT GLORIOUS MOMENT WHEN YOU CAST OFF THE SHACKLES OF CORPORATE LIFE, CASH IN YOUR PENSION AND DRIFT OFF INTO THE SUNSET, PINA COLADA IN HAND? OR DO YOU HAVE OTHER PLANS? EITHER WAY, THINKING BIG COULD HELP ACHIEVE YOUR GOALS.

ISA allowance, for sheltering your money from income and capital gains tax.

Annual allowance for tax relief on your pension payments (or 100% of your earnings if lower) provided you don’t earn £150,000 or more (including any pension contributions) and haven’t already started taking income from your pension.

Your personal savings allowance for earning income tax-free in a cash savings account if you’re a basic rate taxpayer.

Your tax-free dividend allowance for investments held outside a tax advantaged product (this is going down to £2,000 from April 2018, so make the most of it while you can).

You can download a free and comprehensive guide to all your 2017/18 tax allowances at alliancetrustsavings.co.uk prepared for us by the experts at Taxbriefs Ltd.

£20,000

Annual allowance for tax relief on your pension payments (or 100% of your earnings if lower) if you’ve already started taking a flexible retirement income from your pension.

£4,000£40,000

The minimum annual allowance for tax relief if you earn £150,000 or more (your £40,000 allowance is reduced by £1 for every £2 you earn over that amount, with a maximum reduction of £30,000).

£10,000 £1,000

£5,000

Your annual Capital Gains Tax exemption for realising gains on investments and other assets that you’re putting towards your life after work.

Your annual Inheritance Tax free allowance for giving cash gifts.

Your personal savings allowance if you’re a higher rate tax payer.

£11,300

£3,000

£500

Sources:1. Office for National Statistics,

UK labour market: April 2017.

2. Office for National Statistics, Trends in self-employment in the UK: 2001 to 2015.


Minimising the tax you pay as you go along just makes sense, and means more money available to you to generate returns. There are some key annual allowances for 2017/18 to bear in mind.

USE YOUR ANNUAL TAX ALLOWANCES

http://www.alliancetrustsavings.co.uk/forms-documents/generic/tax-tables.pdf


FOR SOME TIME, DEFINED BENEFIT (DB) SCHEMES HAVE BEEN CONSIDERED THE GOLD STANDARD FOR PENSIONS. THEY PROVIDE A GUARANTEED INCOME FOR LIFE BASED ON FINAL SALARY. THEY ARE SO VALUABLE, IN FACT, THAT THEY HAVE BECOME TOO EXPENSIVE FOR MANY COMPANIES TO PROVIDE AND MOST NO LONGER DO SO. SO WHY ARE SOME PEOPLE, FORTUNATE ENOUGH TO STILL HOLD ONE OF THESE TREASURES, CONSIDERING TRANSFERRING OUT?

keen to offload their longer-term liabilities and are therefore boosting the transfer values they offer to get people off their books.

If you want to buy a guaranteed income for life on the open market, this higher transfer value isn’t particularly helpful. Annuity rates have fallen with interest rates, so it’s likely you’ll have to pay more to get the same level of income you would have had from your DB pension anyway.

However, for those contemplating taking a flexible retirement income through pension drawdown, it potentially creates an alternative option. Of course, generating a decent level of income isn’t always easy and it’s particularly difficult to match the guaranteed income that would be received under a DB scheme. But, if you have income sources elsewhere, and don’t need a fixed level of income from your pension, it may be tempting to take the cash.

It should be said that the higher transfer values seen of late are not universal. Reductions are made if schemes are underfunded, which has been a problem for some.

Flexible accessSpending habits will vary through retirement. You might have ambitious plans in your 60s and 70s, while you are still relatively young and in good health, but may spend less in your 80s. You may think a DB scheme doesn’t offer you sufficient flexibility in terms of the pattern of the income it pays.

For DB schemes, the income usually increases annually in line with inflation and therefore tends to be higher later in life. If you transfer to drawdown, you can draw more in the early years.

Death benefitsIncome for a husband or wife is built into most DB schemes, typically around 50% of the original pension. Occasionally schemes will also allow some legacy income for dependent children. You may have the option to complete an Expression of Wish form (remember how important this is from the Denise and Lenny Brewster case we looked at in Wishing well on page 12). However, the rules around inheriting

In the great majority of cases, you just wouldn’t. It is very difficult and risky to try replicating a guaranteed retirement

income through taking a cash transfer of your DB pension and reinvesting in a defined contribution pension pot, where you are exposed to investment risk and have no guarantees. We looked at a few of the challenges in Marathon not a sprint on page 8.

That said, there are several reasons temptation may strike:

Higher transfer valuesTransfer values from DB schemes – the cash value you receive for giving up your pension rights – are based on a number of factors, but an important part of the calculation is the level of interest rates. Lower interest rates inflate the transfer value. Some holders of DB pensions have seen the money they would receive for transferring their pension rise significantly over the past year. Also, some companies are

DB pensions can be rigid and if you are not married or don’t have dependent children, the pot could be lost altogether when you die.

The rules around drawdown pensions are far more flexible. You can freely choose your beneficiary(ies). If they take the remaining pot as a lump sum or income drawdown, it will usually be tax free if you die before 75, or taxed at the beneficiary’s marginal rate of income tax if you die at an older age. The person who inherits can use your remaining pot to buy a (taxable) guaranteed income for life if they wish. All options are free from inheritance tax.

Shorter life expectancyIn the main, people are prone to underestimating their life expectancy. But what if you have a condition that is likely to reduce your life expectancy? In this case, you may be able to buy an enhanced annuity on the open market with your transfer value that would be higher than your DB pension. Or you could invest it in a drawdown pot to use flexibly and – should there be anything left by then – pass on after you die*.

Those in better health may be more likely to get a better total return from a guaranteed retirement income. While those in very poor health may find they (and their broader family) are going to be better off in drawdown.

A serious decisionGiving up a guaranteed, inflation proof, income for life takes serious consideration. Anyone wanting to transfer a DB scheme with a value of more than £30,000 must take financial advice and this should include a pension transfer value analysis. The financial adviser needs to make sure you are not likely to be worse off after a switch.

In all cases, your ability to withstand investment losses will be important. Being in a drawdown pension pot puts capital at risk. This may seem less important if you have other assets to help generate retirement income. But, at all times, you need to be wary – transferring out of a DB scheme is only likely to be the right option for a limited range of people.

Tempted to transfer


* Please note that if you transfer while in poor health and then subsequently die within 2 years of that transfer, the government may deem this to be a “transfer of value” and as such this transfer amount may be considered part of the estate on death, which would therefore qualify for IHT.

IF YOU’VE ALREADY RETIRED, YOU MAY HAVE A COMPANY PENSION AND THE STATE PENSION, SO FEEL WELL PROVIDED FOR. BUT WHAT IF YOU ALSO HAVE ONE OR MORE ‘TRIVIAL’ PENSIONS WHICH PAY OUT JUST A TINY AMOUNT EACH YEAR? IS IT POSSIBLE TO ACCESS THE POT THAT FUNDS A TRIVIAL PENSION AND INVEST IT YOURSELF?


As you start thinking more actively about your life after work, it can be worth bringing all your pensions together so that you can benefit from economies of scale and ease

of administration.

Taking controlYour first step is to find all your pensions. In 2016 the Department of Work and Pensions launched a new Pensions Tracing Service website, designed to help reunite people with their lost pensions by providing up to date contact details for employer schemes. You can find this at www.gov.uk/find-pension-contact-details.

Things will move to another level with the new Pensions Dashboard initiative, planned for launch in 2019. This should let savers see the values of all their pensions and pension pots in one place and help plan for retirement more effectively.

However, you don’t need to wait for 2019 to take control of your pension pots. A good starting place is your own files, the attic and

WE ALL KNOW NOW THAT A JOB FOR LIFE IS INCREASINGLY RARE: PEOPLE MAY THINK MORE IN TERMS OF ‘PORTFOLIO CAREERS’ AND HAVE AN AVERAGE OF 11 JOBS DURING THEIR WORKING LIFE. THAT IS A LOT OF POTENTIAL PENSIONS TO TRACK. IT IS ESTIMATED THAT THERE ARE AROUND £400M IN UNCLAIMED PENSION SAVINGS.

Time to harmonise your pension pots?

Trivial pensionseven under the bed. Dig out all the paperwork you can and ask former employers. Even if the amounts are small, they may give your retirement income a helpful boost.

Approaching life after work?You can consolidate at any time, but the need to do so may become more pressing as you approach retirement.

You may get a better deal from an annuity provider if you have one large pot rather than several small ones. Both rates and fees tend to be lower. Equally, it is far easier to keep track of a larger pot than lots of little ones – you will know when to expect it each month and how much you are likely to receive.

When it comes to managing a pension drawdown pot, it helps to have one pot managed with one set of investment goals. The risk of juggling lots of smaller pots is that a portfolio becomes too skewed to one asset class or another and no-one realises. Having everything in one place allows for stronger oversight and means that long-standing plans are not likely to be left stagnating in poor performing investments. From a practical point of view, it’s also likely to make life easier for your dependants after you are gone.

It is worth bearing in mind though that you may be charged for pension transfers. So you need to do the calculations to ensure the costs of consolidating are worth it. Fees should always be a factor in deciding how and where to switch your pension pot. Flat fees tend to work better for larger pots, for example, rather than a percentage of assets under management.

In a defined contribution scheme, the value of a trivial pension is simply the amount of money in the pension pot. The rules are more complex for a defined benefit scheme, where the valuation is determined by the pension provider. As a rough guide, the value is likely to be something like the annual pension entitlement, multiplied by 20, plus any separate tax-free cash sum.

Beware tax though. When the trivial pension rules are used before any benefits have been paid, retirees can usually take a quarter as tax-free cash sum with the rest added to taxed income for the year. If you have already taken some benefits the lump sum value will simply be added to your taxable income. This may influence when you choose to convert any trivial pensions. It may be worth doing so in years when he has a lower income, for example.

If you decide taking the money from trivial pensions is right for you, getting hold of the pot should be straightforward. You simply need to contact your pension provider and they will be able to facilitate the payment.

It’s up to you what you do with the money from there.

Trivial pensions are increasingly common problem as people move jobs more often. The

problem with small pension pots is that they are one more thing to administer, and tend not to receive the best rates from annuity and pension drawdown providers. Often, retirees would rather have the capital to save or spend as they wish.

One way to deal with small pots is to combine them with larger pots. But if you are already well provided for through a valuable existing pension, another option is to take the money funding any trivial pensions and invest it yourself.

Small pots are defined as pensions with less than £10,000 in them (or worth less than £10,000 in the case of a defined benefit pension scheme).

The current rules allow up to three small non-occupational (private) pensions already in payment or an unlimited number of occupational pots to be exchanged for an immediate lump sum.

There are certain criteria: The member needs to be 55 or over. Each lump sum needs to be less than £10,000 when it is paid over and taking it will mean forfeiting all rights under the scheme.

Please do share your feedback on Your Retirement and, like Stephen, let us know if there is anything you’d like us to cover in future issues. Email [email protected]

READERREQUEST

AT THE REQUEST OF YOUR RETIREMENT READER, STEPHEN, 64, WE LOOK AT WHAT’S INVOLVED.



Work out how much you have nowThe starting point is to determine how much your current pension, savings and investments are likely to give you in retirement. You should do this several years before you retire. This includes:

Checking your state pension entitlement (www.gov.uk/check-state-pension).

Finding out how much any current workplace pension is likely to give you.

Getting details of all pensions from previous employers or using the Government’s pensions tracing service to find them (www.gov.uk/find-pension-contact-details).

Contacting any private pension plans you have for a current projection.

Looking at how much income might be generated by other sources of wealth – for example any buy to let property, ISAs, other savings and investments, an expected inheritance.

Once you have an idea of how much you might need, our interactive tools can help you work out how much you’re likely to need to invest to get there, and whether you’re currently on track. Find them at alliancetrustsavings.co.uk/investing-hub/tools


Work out how much you needNext, think about the type of retirement you want and how much that is likely to cost.

Draw up a budget to look at where your income comes from and how you spend it now.

Decide on the changes you might need to make to live comfortably in the years ahead. Will you have a mortgage? Will you be supporting children?

Work out the difference between what you have and what you needThere are really only three ways to boost your income for life after work: save more, spend less or retire later. Many pension providers will offer access to projection tools to help with this process.

Deal with any debtsCan you pay them off? Those with the highest interest rates should go first.

Decide what you are going to do about workAre you going to retire completely? Are you going to start a new business or retain interests on the side? Non-exec directorships, for example? This will help you understand when to start taking pension income. Deferring a pension can provide a valuable boost to income so don’t take it until you need to.

Determine what you want to leave behind and to whomDo you have dependents who will expect or need support? Or any person or cause you would particularly like to provide for? Talk to your family about your plans, so everyone knows what to expect.

Get the legal paperwork in placeOrganise a Will if you don’t already have one, or make sure your existing Will is up to date. Sort out Expression of Wish forms for your pensions (see Wishing well on page 12) if you need to. Consider a Power of Attorney too. A sensible precaution should you become incapacitated and unable to make your own decisions.

Get professional adviceIt may seem expensive, but if you really want to get the best out of life after work and still pass wealth to the next generation, it can be well worth paying for one or more consultations with a professional financial adviser and any other specialists appropriate to your plans – for example a lawyer or tax adviser.

Your checklist for life after workBY NOW WE HOPE YOU SEE THAT, WITH A BIT OF FORWARD PLANNING, YOU CAN HAVE A REWARDING LIFE AFTER WORK – WHATEVER THAT LOOKS LIKE FOR YOU – AND STILL PASS ON WEALTH TO THE NEXT GENERATION.

NOW IT’S TIME FOR ACTION. HERE IS A CHECKLIST TO GET YOU STARTED.


Gregg McClymont, Head of Retirement Savings at Aberdeen Asset Management, brings a consumer focused perspective to the rapidly changing world of pensions and investment. Previously a professional historian (St Hugh’s College, Oxford) and a politician (MP and Shadow Pensions Minister), Gregg joined Aberdeen in July 2015. Gregg is a Visiting Fellow at Nuffield College, Oxford and sits on a number of pensions industry related policy and technical committees. Gregg’s new co-authored book Towards a new pensions settlement: the international experience (Rowman and Littlefield, 2016) is just published.

It is a morbid and uncomfortable subject, but our eventual demise, and especially the timing of it, matters greatly when

planning for our later life. We need to think about how long we will live in retirement and how we fund it. Part of being effective actuaries will be recognising the three levers at our disposal: savings, retirement date and standard of living.

Our task as individuals, with responsibility for our own retirement, is infinitely harder than that of an actuary. By definition the pooling which defines actuarial science is absent. We are either dead or alive – there is no average. Since we can’t model our longevity, how can we overlay a required rate of investment return or a sustainable income withdrawal rate? Judging how long an individual life will last is art not science. The fear of living longer than we bargained for often contributes to the phenomenon of retirement under consumption.

Retirement is by definition individual – they are so many variables in play whether in terms of health, dependents, tax, bequests, and the like. Doing it for ourselves (or, ideally, with the help of a financial adviser) opens up the possibility to better tailor our retirement savings pot to our own lifetime spending needs and goals.

With greater freedom comes greater responsibility Systems without compulsory insurance based retirement provision are not new: in the US, Australia, New Zealand and Hong Kong, for example, longevity insurance i.e. annuities have never been popular. Citizens have always had the right to do it themselves.

But with rights come responsibilities.

As we, individually, take on greater responsibility for making our retirement income last our lifetime we need to gain a better understanding of our life expectancy and investment risk, as well as inflation, compounding and sequence of returns risk.

A greater overall appreciation of how long we are living is required. World Health Organisation statistics put average global life expectancy at 71.4 as of 2015; in 1960 the figure was 52.4 years. It is also a moving target. As medical advances continue apace, your life expectancy is likely to rise further from the at-birth time series estimate: i.e. you will live longer than the life expectancy figure assigned to you at birth suggests. Assuming the same growth rate that has applied steadily in the past two hundred years, people born today have a 50% chance of living to 104.

Working through the sums Living the 100 year life means rethinking how much we save, when we retire and how much we spend in retirement. It also means recognising the need to grow your savings in retirement as well as draw an income from them. This means taking on investment risk. Not least to protect your income against inflation.

Inflation is a silent assassin. It is not something most people think about on a daily basis, but is essentially the time decay of money – gradually eroding the purchasing power of your money. Worse still, as we all live longer, we give it more time for its insidious effect to take hold.

But time can work in your favour, too. The power of compound returns is the eighth wonder of world, as Einstein once said. It demonstrates that time, literally, is money.

Someone who saves from the ages 21-30 and then stops, ends up with more money at retirement than someone who saves for 40 years, but only started saving at 30 (Source: CLSA, assumes 7% per annum growth). By a similar token, sharp and unfortunate drops just before or after you start to draw an income from investments can be nigh on impossible to recover from – even when the average return is reasonable over the course of retirement investing – this is known as sequence of returns risk.

Over to you, thenBeing your own actuary is not easy. But it isn’t impossible either. Save more, work longer, spend less.Invest shrewdly with both eyes on the risks of longevity, investment and inflation.

In certain countries, we can already see a hybrid model evolving where essential income needs are met via the state pension and other assets with discretionary income from drawing down on still-invested pots of money. This is both practical and sensible. So too is the increasing prevalence of older workers in the labour market and rising state pension ages.In this way Governments can prescribe and proscribe individual behaviours; nudge and coerce. We are not totally on our own. But in the end the responsibility for retirement is ours, increasingly. It is time to unleash that inner actuary.

We are all actuaries now DEATH AND TAXES ARE INEVITABLE, AS THE SAYING GOES. SO TOO, INCREASINGLY, IS INDIVIDUAL RESPONSIBILITY FOR RETIREMENT. AS GOVERNMENTS AND EMPLOYERS RETREAT FROM THE FIELD ON THE GROUNDS OF COST SO THE RESPONSIBILITY FOR RETIREMENT SAVING AND SPENDING PASSES TO INDIVIDUALS. WHETHER WE LIKE IT OR NOT, DO-IT-YOURSELF IS THE NEW MANTRA. LONGEVITY RISK, INVESTMENT RISK, INFLATION RISK – IT’S THE DUTY OF INDIVIDUALS TO MANAGE THESE ON THEIR OWN ACCOUNT. WE ARE ALL ACTUARIES, NOW.

By Gregg McClymont, Head of Retirement, Aberdeen Asset Management

The value of investments, and the income from them, can go down as well as up and your clients may get back less than the amount invested.Important information: The details contained here are for information purposes only and should not be considered as an offer, investment recommendation, or solicitation, to deal in any of the investments mentioned herein and does not constitute investment research as defined under EU Directive 2003/125/EC. Aberdeen Asset Management does not warrant the accuracy, adequacy or completeness of the information contained herein and expressly disclaims liability for errors or omissions in such information and materials.No information contained herein constitutes investment, tax, legal or any other advice, or an invitation to apply for securities in any jurisdiction where such an offer or invitation is unlawful, or in which the person making such an offer is not qualified to do so.Issued by Aberdeen Asset Managers Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom.


BY NOW, THE PROBLEM IS QUITE FAMILIAR: THE NEED FOR INCOME IN RETIREMENT HAS BEEN GROWING DRAMATICALLY, BUT MEETING THIS DEMAND IS BECOMING INCREASINGLY CHALLENGING. HOW CAN YOU ENSURE THAT YOU HAVE ENOUGH MONEY TO LIVE, MAKE THE MOST OF THIS PHASE OF YOUR LIFE AND PASS SOMETHING ON?

In recent years, traditional retirement income sources such as bank deposits, mainstream government bonds and annuities have been

offering income seekers considerably less than they used to. Coupled with this is the fact that most of us will have a longer retirement to fund as life expectancy increases.

To help meet these challenges, the government has introduced pension reforms offering greater flexibility for retirees to use their hard-earned pension pots to try to create better financial outcomes for themselves and their families. But how do they represent an improvement on the traditional approaches?

Traditional approaches: the drawbacksThe traditional approach to generating retirement income is simply drawing an income from savings over time. However, inflation is likely to erode the value of your pension pot. When we think about the importance of growing our capital to at least keep pace with inflation, we can see why it might be dangerous to try and fund our retirement in this way – in effect, depleting rather than growing capital.

Where savings have not been sufficient, some people have been investing the pension pot in the financial markets and then gradually drawing down capital at a set ‘withdrawal rate’ as a percentage per year. But since we do not know how long we will need income for, or indeed how investment markets will behave over that time horizon, how can we decide on the appropriate asset allocation or the correct rate at which to withdraw capital to avoid running out of money too soon?

This chart demonstrates how quickly a pensions or savings pot could be depleted if income had been drawn from capital at various rates in a portfolio invested in UK company shares (equities) since 2000.

Spreading the risk However, there are products that allow you to generate income while still growing the underlying capital. These work by investing in assets that naturally produce income such as via equity dividends, bond coupons or property rental streams.

But all methods of investing involve accepting a level of financial risk in order to try and generate better outcomes than traditionally ‘safe’ options are offering. In order to access the highest returns, you might have to tolerate some

meaningful ups and downs (ie volatility) in the market. This will have less relevance for investors with long time horizons. However, for people approaching or in retirement, such market movements could be difficult to stomach.

Diversification is a well-established way of making market turbulence easier to tolerate. Diversification is essentially the concept of spreading risk across assets which can be expected to behave differently at different times. In other words, not putting all your eggs in one basket.

Considering solutionsOne way of achieving this is by investing in a multi-asset fund. Multi-asset approaches to investing seek diversification of both the types of asset (equities, bonds etc) and the source of income. This offers the potential to combine the benefits of different sources of income, while reducing some of the risks of investing in a single asset class.

Furthermore, some multi-asset funds will pay investors a regular income. A key point is that many of these funds, such as the M&G Episode Income Fund, will aim to provide capital growth along with an income stream. At M&G we believe capital growth is a very important consideration for income seekers as it provides the potential for income to keep pace with inflation and also offers the chance to keep growing your nest egg, rather than depleting it over time by drawing all the income you need from your savings ‘pot’. In running the M&G Episode Income fund our philosophy has always been that ‘today’s capital is tomorrow’s income’.

Of course, investing in financial markets always involves a level of risk and you will still need to keep sufficient cash in the bank to meet your essential needs. However, individuals who can afford to take a certain amount of risk with

some of their savings may find putting portion of their cash to work in a fund can open up opportunities to provide a boost to their retirement savings to this exciting stage of their lives and have something left over to leave for their loved ones.

When we recognise how important it is to grow capital, it is clear why we think it is vital for investors to consider how income is generated. For us there are two important elements. The first is to aim to generate ‘natural’ income rather than drawing income from the capital base. This means multi-asset income funds will often invest in financial assets that pay an income themselves such as in the form of stock dividends, bond coupons or property rental streams. The second is to be realistic about investment goals and avoid the temptation to invest in assets that may be overly risky, just to access a very high income.

With the above considerations in mind, and in partnership with an adviser, ask yourself some important questions about what action you can take now. The new pension landscape undoubtedly holds challenges. However, by making a disciplined plan for funding your retirement, you can ensure that these years are both financially secure and enjoyable.

Risk warning: The value of investments and the income from them will fluctuate. This will cause the fund price to fall as well as rise. There is no guarantee the fund objective will be achieved and you may not get back the original amount you invested.We are unable to give financial advice. If you are unsure about the suitability of your investment, speak to your financial adviser.The views expressed in this article should not be taken as a recommendation, advice or forecast.The M&G Episode Income Fund allows for the extensive use of derivatives.

Planning a Sustainable RetirementBy Steven Andrew, Fund Manager, M&G Episode Income Fund


Steven Andrew joined M&G in 2005 as a member of the portfolio strategy & risk team, before moving to the Multi Asset team, where he helped to formulate asset allocation strategies for M&G’s multi-asset fund range. In November 2010, he was appointed manager of the M&G Episode Income Fund. Three years later, he became manager of the M&G Income Allocation Fund. Steven began his career at the Bank of England in 1987 and subsequently worked at F&C Asset Management and Merrill Lynch before joining M&G. He holds a BSc (Hons) degree in financial economics from the University of London.

This financial promotion is issued by M&G Securities Limited which is authorised and regulated by the Financial Conduct Authority in the UK and provides ISAs and other investment products. The company’s registered office is Laurence Pountney Hill, London EC4R 0HH. Registered in England No. 90776.

How long until you’re bust? The downside of withdrawing income

Past performance is not a guide to future performance. Source: Investment performance based on the FTSE All Share. Assumes annual withdrawals increase by 2.5% per year. * Relates to annual withdrawal amount.

£100,000 invested in 2000 and income withdrawn monthly.

£4,000* £5,000* £6,000* £8,000* £10,000*

£0

£20,000

£40,000

£60,000

£80,000

£100,000

£120,000

201720152013201120092007200520032001

AGE70

AGE65

AGE75

AGE80

John Spedding, Head of Investment Trusts at Schroders, has worked in the investment trust industry for 27 years. He joined Schroders in 1997 and before heading up the investment trust business from 2016, he held various roles including Head of Asset Management Secretariat within Schroders’ Governance team. He has a degree in business law.

The second element has become more important after new freedoms were handed to pension savers in 2015. Rules

that forced most people to buy an annuity were abolished. Instead more savers are keeping their money invested and hope to live on the returns to provide an income.

The challenge is two-fold: where to find enough investment growth and income; and how much is a safe amount to withdraw each year.

A rule of thumb in the US was that 4% was the optimal amount to withdraw from a pension – starting at a withdrawal rate of £4,000 from a £100,000 pot and rising with inflation. Taking any more runs the risk of the pot dwindling and running dry within 30 years, so the “4% rule” goes.

But this was in the days before the financial crisis. With lower rates and lower returns, the figure may be lower.

In fact it may have always been too high. Research conducted last year by Morningstar, an investment analysis firm, challenged the notion. It looked at historic safe rates of withdrawal for different countries. It concluded, retrospectively, that the UK should have had a “2.5% rule” and that looking forward, based on a balanced portfolio, 3.2% might be the highest amount that could be safely drawn each year¹.

It was suggested that a retiree wanting income of £10,000 a year, increasing with inflation, would need to start with a pot of £312,500.

An alternative approach is to try and live on the natural yield of your portfolio. Taking the

income produced – the FTSE 100 currently yields around 3.5% – should still allow the capital to grow uninhibited by regular capital withdrawals. It also leaves you with a larger pot to bequeath.

Either strategy highlights the need to find investments that pay steady and reliable income. If relying on equities to do this, it is also important to back companies that will be able to grow the dividends they pay.

UK equities, however, are not the only source of income. Investors might consider holding a small amount of their portfolio in commercial property, where income tends to be higher than for equities.

Overseas stockmarkets could improve the overall yield on a portfolio. They may also offer better chances of capital growth, although there is the added risk caused by swings in currencies

MSCI stockmarket indices measure the yield on major markets. The MSCI World index, a proxy for the globe’s biggest markets, has a yield of 2.4%. In comparison, Europe offers 3.4%². But arguably the continent has weaker growth prospects than some regions.

Some investors believe the outlook for Asia is strong. Countries such as Thailand, India and Indonesia have very young populations and fast-growing bands of middle class consumers.

It is also worth considering that while Asia represents 11.3% of the global equity market, it boasts 36.7% of stocks that yield over 4%³.

Matthew Dobbs has invested in Asia for 30 years and has managed the Schroder Oriental Income Fund plc since it was launched in 2005.

Matthew pointed out that “payout ratios”, a measure of whether companies can afford to pay dividends, were strong in Asia.

He said: “There’s an excellent spread of companies in Asia and plenty of options for fund managers who are looking for income stocks. And it’s not just the sort of stocks you would associate with high income. You find plenty of tech companies that pay decent dividends when in places such as the US, they quite often don’t.”

More broadly, investment trusts have special characteristics that should appeal to income investors. They have the ability to “smooth” dividends. They can store up to 15% of the income they receive each year and can use these reserves to boost dividends when times get tough.

When it’s difficult to calculate the right amount to draw down from a pension portfolio, a bit more certainty on future income is invaluable.

What are the risks?• Past performance is not a guide to future

performance and may not be repeated. The value of investments and the income from them can go down as well as up and investors may not get back the amount originally invested.

• Investors in the emerging markets and the Far East should be aware that this involves a high degree of risk and should be seen as long term in nature. Less developed markets are generally less well regulated than the UK, they may be less liquid and may have less reliable arrangements for trading and settlement of the underlying holdings.

• The company invests in smaller companies that may be less liquid than in larger companies and price swings may therefore be greater than investment trusts, companies and funds that invest in larger companies.

• The company holds investments denominated in currencies other than sterling.

• The company may borrow money to invest in further investments, this is known as gearing. Gearing will increase returns if the value of the investments purchased increase in value by more than the cost of borrowing, or reduce returns if they fail to do so.

• Investment in warrants, participation certificates, guaranteed bonds, etc will expose the fund to the risk of the issuer of these instruments defaulting. Deducting charges from capital can result in the income paid by the company being higher than would otherwise be the case and the growth in the capital sum being eroded.

• As a result of the fees being charged partially to capital, the distributable income of the company may be higher, but the capital value of the company may be eroded.

Rising to the income challengeONE OF THE BIGGEST CONCERNS FOR BRITISH INVESTORS IS HOW MUCH TO SAVE FOR RETIREMENT – AND HOW THEY CAN MAKE IT LAST.

By John Spedding, Head of Investment Trust, Schroders


Past performance is not a guide to future performance and may not be repeated. The company holds investments denominated in currencies other than sterling, investors should note that exchange rates may cause the value of these investments, and the income from them, to rise or fall. For investment advice, speak to your Financial Adviser. If you don’t already have an Adviser, you can find one at www.unbiased.co.uk or www.vouchedfor.co.uk. Issued by Schroder Unit Trusts Limited, 31 Gresham Street, London, EC2V 7QA. Registered Number 4191730 England. Authorised and regulated by the Financial Conduct Authority.

Schroders Oriental Income Fund Limited: Discrete Yearly Performance (%)

Source: Schroders, bid to bid price with net income reinvested, net of the ongoing charges and portfolio costs and, where applicable, performance fees, in GBP, as at 31 May 2017.

Q1 2016 – Q1 2017

Q1 2015 – Q1 2016

Q1 2014 – Q1 2015

Q1 2013 – Q1 2014

Q1 2012 – Q1 2013

Share price 39.0 -6.5 23.0 -9.5 28.8

Net asset value 32.7 -1.4 19.3 -6.7 28.7

MSCI AC Pacific ex-Japan Net TR GBP 35.8 -8.6 18.3 -6.8 17.1 Sources:1. Source: Morningstar

as at 1 May 2016

2. Source: Bloomberg as at 28 March 2017

3. Source: FactSet, MSCI, Schroders, as at 31 December 2016

Source for award: Moneywise as at March 2017.

Ways to do business

ATS GEN MAG 0021 (Issue 4 | 2017)

Alliance Trust Savings Limited is a subsidiary of Alliance Trust PLC and is registered in Scotland No. SC 98767, registered office, PO Box 164, 8 West Marketgait, Dundee DD1 9YP; is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, firm reference number 116115. Alliance Trust Savings gives no financial or investment advice.

ONLINEManage your account online at alliancetrustsavings.co.uk• Same day set-up and trading (conditions apply)

• Buy and sell online

• Online monthly dealing

PHONE01382 573737Our real-time telephone dealing service is available during normal UK market opening hours. You can also do this online for a reduced charge. Calls may be recorded for security and monitoring purposes.

POSTAlliance Trust Savings Limited, PO Box 164, 8 West Marketgait, Dundee DD1 9YPSend us your instruction form and cheque and we’ll process your trades. However, you can also do this online for a reduced charge.

For full details of all charges please visit alliancetrustsavings.co.uk

Documents

Retirement Your - Alliance Trust...Contents Welcome Alliance Trust Savings Limited PO Box 164 8 West Marketgait Dundee DD1 9YP Tel +44 (0)1382 573737 Fax +44 (0)1382 321183 [email protected]