If capital drawdown is managed well, higher rate tax can often be avoided altogether which is more difficult to do in another investment vehicles without the tax free portion. It’s true, that in some years the capital will fall in value, but it will often recover. In a volatile market this can be a bad idea. Sometimes it’s because they fear future changes to pension rules, sometimes it is to repay a mortgage or simply because they just want to have the money as they retire. I notice many people request to take money from a pension pot to then hold this within another investment vehicle as soon as they can. The income is being taken from a tax-free environment to one where tax is due, although if the available tax free lump sum has not been taken previously, 25 per cent of what is taken is without income tax. In financial planning, regardless of how much income pensioners are drawing down, it is important to do it in a tax efficient manner. Read more: What can a retiree do about pension exit charges? I also recommend they keep at least one year’s income in cash for quick access. Pensioners are better protected against stock market falls if their retirement income isn’t riding on the performance of one sector or stock. The importance of spreading assets across shares, government and corporate bonds, cash and property cannot be over-stated. If someone is more sanguine about short term volatility, then stocks are appropriate as part of a diverse basket of assets. When an investment declines in value, maybe 5 or 6 per cent in a year, what is the pensioner’s reaction? If the first instinct is to panic and blame the adviser, then that person should not have a big exposure to the stock market. This is where a good financial adviser can educate clients on the pitfalls of the global stock market and the importance of a long-term attitude and a balanced portfolio. Managing expectations and understanding risk is vital. So what is the right approach in uncertain times? For anyone who can afford to grow their fund, falling share prices offer opportunities to buy at often bargain prices.ĭrawdown is a long-term commitment that needs careful planning. History shows the biggest gains often occur immediately after a crisis. When stock markets around the world are volatile, it’s tempting to overeact and sell after setbacks, but investors should try to avoid this. Flexi-access drawdown in retirement is a welcome new freedom but works best for people who are financially disciplined or who are receiving good advice.
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