Take control of your retirement

Those coming up to retirement need all the help they can get to weather the punishing financial climate, says Lorna Bourke.

Retirement planning is the area where savers most seek help from the experts, and in today’s investment environment it isn’t difficult to see why.

Some 38% of all searches for independent advice on unbiased.co.uk are for personal retirement planning. ‘With recent stock market volatility and all-time low annuity rates, people are understandably worried about their retirement provision,’ says Karen Barrett, chief executive of unbiased.co.uk.

Pensions expert Tom McPhail at IFA Hargreaves Lansdown agrees. ‘Investors looking to draw a retirement income from their pension funds are facing an income crisis. Annuity rates are at record lows, drawdown income limits have been cut, pre-retirement fund values have fallen, investment markets and economic prospects are volatile and uncertain, and inflation is currently around 5%.’

Retirement incomes cut

Annuity rates are lower than they have ever been before. For a 65-year-old man the yield is now just over 6%. Back in 1990 it was 15%. The yield on inflation-linked annuities is around 3.7%, while a fixed increase annuity rising at 3% a year would pay around 4.1%. This means that to provide a pension of £25,000 a year, (not counting the state pension), the pension pot will need to be around £400,000, which is out of the question for many.
 
Drawdown income limits have been cut by the combined effect of falling yields on gilts (government stock) and a government restriction on the maximum income that can be taken, down from 120% of an annuity to 100%. The result is that income limits are now 20% to 30% lower than five years ago.  

Even those who think they have made sufficient provision can find themselves caught out by poor investment returns and falling annuity rates. Someone who had £100,000 in a pension pot in January 2000 invested in a fund linked to the FTSE 100 would have lost around 25% of their savings over the past 11 years.

Online help and analysis

Part of the problem is massive uncertainty. But a new online service from RetireEasy.co.uk aims to give people the information to take control of their finances and plan for the future. Users fill in a questionnaire – much like a chartered financial planner’s fact find – about their income, expected pensions, savings and assets, and can add variables such as the expected rate of inflation, the age at which they want to retire, investment returns and the level of income they would like in retirement.   

‘We found it extremely difficult to formulate a figure that would give us clarity on how much we could spend in retirement without falling short,’ explains Richard Collinson, who put the service together with his wife, Naomi, and financial adviser Mark Soper.

And as Collinson points out, some people may be worrying unnecessarily. ‘People are often reluctant to spend capital in case they run out.’ But the service can show individuals how much of their capital they can afford to spend without leaving themselves penniless. The projected situation and analysis comes up as bar charts, which show when you are spending capital and how long you can afford to do so.

RetireEasy is about to launch the 'Life Plan Connect', which will enable the user’s IFA to access information in the plan online, meaning the adviser can see the effects of various investment strategies. The service is independent and secure but does not give advice. The service is aimed at people who like to manage their own finances, and is likely to prove popular with retired accountants, although it is simple enough for anyone to use. The service costs £79 for the first year for an individual and £99 for a couple. 

Aim for natural yield

In the meantime what should those coming up to retirement, or in retirement already, do? McPhail suggests that if you’re in pension drawdown already and you’re going to have to take a cut in income then the sooner you do it the better. ‘A good starting point is to take income at the level of the natural yield of the underlying investments – the dividends on equities, the coupon on fixed interest etc.’
 
For investors reaching retirement and looking at buying an annuity, delaying for a year in the hope of getting a better income probably won’t pay off, he warns. ‘Don’t just take a level income if you can possibly avoid it, unless you really don’t expect to live for very long. An inflation-linked annuity is an expensive luxury but at the very least use some of your pension fund to buy some fixed increase annuity; alternatively split your pension fund between drawdown and a level annuity.
 
‘Consider phasing your annuity purchase over a few years, possibly using drawdown. This will spread the risk of getting it completely wrong at one single moment, though it does also mean that inevitably some transactions will work out better value than others. Always shop around for the best deal.’

Get the right advice

And of course, take professional advice from a qualified retirement planner. Citywire's Adviser Finder service is the ideal place to find the advice you need.