Automated withdrawals to make pensions simpler and safer
When you retire, the last thing you’ll want to do is worry where your monthly income will come from, or spend your precious freedom shifting money around.
Most people want a pension that is consistent, stable and sufficient for their everyday needs – hopefully with enough for some extra income on top.
A brief history of pensions income
Before the 1990s, most people who received a pension had a final salary arrangement. The benefits from these were great – they paid out a proportion of the salary you were earning when you retired, based on the number of years you’d worked for the company offering the scheme.
They also had another great feature: you didn’t need to think about anything! When you retired and started taking your pension, everything was done for you. All you saw was an income just like a wage hit your bank account each month for life.
Then these great schemes started to close. Many employers found them just too expensive. These days only a few lucky people work for companies where they can still build up final salary benefits.
Gradually, defined contribution (pension pots) replaced final salary schemes as the norm for workplace pensions. On the surface they seem similar: both you and the employer pay into the pension. But that’s where the similarity ends. Instead of receiving a proportion of your final salary in retirement, you build up a pot of money based on the contributions that you and your employer have made. That money is invested, so by the time you get to retirement, your pot will include the contributions from you and your employer, plus investment returns.
Until the mid-2010s, when you reached retirement, nearly everyone had to convert their pension pot into a guaranteed income for life (called an annuity). Annuities were unpopular for many reasons, but again they had one great feature. You didn’t need to think! You bought one and after that, the money just hit your bank account each month for life.
So what happens now?
In 2015 everything changed. New legislation meant you no longer had to buy an annuity at retirement. You could now take your money as an annuity, cash or by using drawdown – which leaves your money invested, but lets you take a regular income from it.
Whilst some retirees take their whole pot in cash, the majority with total pots over £50,000 are being sensible. They plan to use their pots (along with other savings they may have) to provide an income each year for life using drawdown.
This choice is very popular, but you need to think carefully and make some complex choices, such as:
- Where should I invest my money in drawdown?
- What is the most tax efficient way to take my money?
And perhaps, most crucially:
- How much should I take each year to avoid running out of money?
Who does that thinking?
At present you essentially have two choices: pay for a financial adviser to do the thinking for you, or do it yourself.
Around half of retirees who choose drawdown opt to pay for an adviser. This is a great choice, as a good adviser will think about everything for you and help you make the right decisions.
This means the other half need to do the thinking themselves. That’s OK, but….
- It’s very hard to plan and execute drawdown on your own and get it all right as it’s very complex
- It takes time and most retirees have better things to think about, like enjoying retirement!
So wouldn’t it be good if there were a third option? What if your pension provider did a lot of the thinking for you when you retire?
A new automated approach
There is already a lot of provider help available when it comes to investing pensions. Most providers offer ready made investment funds which are designed by experts. Most people choose these ready made options, rather than trying to do it themselves.
However, there are currently no providers that offer an automated, tax efficient withdrawal plan as well as looking after your investments. So how could this work?
It starts with three simple questions….
1. What shape of income do you want: Flat, Increasing or a good Spending Match? These three income shapes are explained in our previous blog here
2. Which type of tax most concerns you – income tax or inheritance tax? We’ve also got a blog post on how to minimise income tax using a combination of tax free income and taxable income here. For most people income tax will be the main issue. To minimise inheritance tax, the best route is to keep as much as possible within the pension scheme. Take income from your savings first wherever you can.
3. Do you want to take only the retirement income you need, and pass on any remaining money at the end of your life? Or do you want to get the highest income possible and not worry about passing any pot on?
With these three answers Guiide will be able to solve the conundrum of how much income you need to take each month and where to take it from across your savings.
We will also introduce new developments, to allow some pension savers to increase their own income and protect against living longer than expected.
What could a plan look like?
Let’s say you choose to shape your income like the diagram above. The red line shows the total income after tax that you want each year. You’ve decided that you want to minimise income tax and pass on any money that’s left at the end of your life to family.
Fixed income – Most people have some fixed income in retirement. This could include the State Pension, or if you are lucky, income from a final salary scheme. You will get a fixed amount each month from these.
Flexible income – You need to take money from your pension and savings pots (in blue), which when added to the fixed income and after tax is deducted, gives you the total amount you need.
How will a Guiide Autoplan work?
Guiide will work out the amount of flexible income to withdraw from your pot each month, to give you the total amount of income you need after tax.
It will also work out the best way to take this as taxable and non taxable income from your pension pots or other savings, to minimise your income tax (or inheritance tax, as you need).
If you then choose a Guiide linked product to bring together all your defined contribution pension pots, your income will simply be paid each month, until you want to change your plan (if you ever do). It’s old-style simplicity that still maintains the flexibility of the new pension freedoms.
But what if…?
…I want to take a one-off payment – No problem. You can request a payment with a month’s notice and receive this in addition to your usual expected withdrawal. Guiide will even show you how to make tax-efficient extra withdrawals.
…I want to change my long term plan – Again, no problem. You can review your plan once a year and change it if you want.
…I run out of money – The Guiide plan is designed to last for your expected lifetime if things go to plan. If you take some added withdrawals, or things don’t go to plan, our track function will let you check if you are still on course to cover your expected lifespan. If not, you can adjust it once a year, to put it back on track.
Where will my money be invested?
Like many other drawdown products, Guiide will work with a specialist partner to provide a ready made investment fund. This will be designed by experts to be suitable for those coming up to and during retirement.
Would you like a product like this?
We’ve had a great response to our previous blogs on tax free cash and income shapes. It’s shown us that people are interested in the idea of an automated retirement income product. We like to give people what they want, so we plan to launch an automated withdrawal product (with some other features) with our partners, in around 6 months time.
Would a product, where everything is done for you, be of interest? If so, do let us know and we will keep you posted on developments.