A revolution in UK pension rules is due to take place next month from 6 April, those of us over 55 and outside of defined-benefits schemes will finally be free from the shackle of a nanny state dictating what we can and cant do with our own money!
But what difference does it make to our retirement investing strategy?
Freedom from annuities
The first major upheaval took place in 2011 when the obligation to buy an annuity with our pension cash was finally abolished. Annuities have historically provided poor returns, and they have the big disadvantage that when you die theres nothing left of your original cash to pass on to your loved ones.
We were still, however, restricted in how much we could withdraw and when. It was possible to take a 25% lump sum tax-free, but further withdrawals every year were capped. But now thats to be consigned to history too.
From next month we will still be allowed that initial tax-free 25% drawdown, but the rest can be treated as any other kind of investment although everything taken from it is taxable, depending on your personal tax status and allowances.
Splash out?
Want to cash in the lot and spend your time cruising the Caribbean? You can do just that if you want, although most people will be more prudent.
For me, the best option is to transfer whatever pension cash you have to a low-cost Self-Invested Personal Pension (SIPP) once you reach 55, which is exactly what Im doing myself. My pension cash will go into shares within my SIPP, almost certainly high-yielding blue-chip shares as Ill be wanting lower risk investments. When Im close to retirement Ill take my tax-free 25%, but the rest will remain in shares.
Want lower risk?
Other people, of course, wont want to risk all their pension on shares even the safe ones crashed during the banking crisis and recession, and it could be painful if that happens just when you need the cash.
If that sounds like you, youre free to keep some of your cash in shares and buy an annuity with the rest. Or, something that might make sense to people still active (and perhaps working part time) in their early retirement, keep investing in shares until you think youre about five years from wanting to take your pension income.
Then start gradually selling off your shares over the next few years, depending on market conditions, and eventually use the cash to buy an annuity for the day you decide to take your well-earned rest the older you are, the better rate youll get.
Shares are still best
For me, though, its going to be shares all the way, drawing down cash as I need it and hopefully leaving a bit of a portfolio behind for the offspring.
But once your pension cash is in a SIPP, what’s the best strategy? There’s a simple approach that can bring great long-term rewards.
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