With all the options for retirement income, finding sources aligned with your goals and income needs can be overwhelming. Once you’ve narrowed down your options, creating a well-planned retirement income strategy is another daunting task. A fundamental understanding of your investment options can help you get on the right path to your goals and needs in retirement. And remember, take the need to finance a long life seriously—you may need your money to last a lot longer than you think.
In this article, we’ll discuss some income options for your pension pot and other retirement savings, and the benefits of each.
Many retirees have a pension—maybe more than one—that they can draw money from during retirement. Pensions offer income in varying degrees of flexibility. In this section, we’ll discuss three types of pensions—the State Pension, Workplace Pensions and Self-Invested Personal Pensions.
The State Pension
The State Pension is a useful source of retirement income for UK retirees. Full pension benefits are available to anyone who has worked in the UK and made qualifying National Insurance Contributions (NICs) for 35 years.[i] How much you will receive and what your pension age is will depend on your date of birth, gender and National Insurance record.
For example, if you lived and worked outside the UK and did not keep contributions up to date, you may not qualify or your entitlement may be reduced. Before you rely on State Pension benefits, make sure you’re eligible to receive them in retirement.[ii]
If your recurring expenses exceed your pension payment, you may need more income.
For high net worth investors, the State Pension can be a good source of income. Yet in our view, many retirees with high-income needs in retirement could require more income than the State Pension provides to cover living expenses.
Occupational pensions pay income once you’ve reached retirement age under the scheme. Your employer has three choices for a workplace pension—defined benefit plans, defined contribution plans or a hybrid of the first two.
Similar to the state pension, a defined-benefit plan pays a specific amount of money after you’ve retired based on the plan’s rules and guidelines.
Defined contribution workplace plans provide a variable benefit after retirement—depending on what contributions you have made and how well your investments within the plan performed. The investment options available to you will vary depending on the scheme. If your workplace offers a defined contribution plan, you should contact your employer’s pension scheme provider to learn more about your options.
If your employer offers a defined contribution plan, you may be able to save and invest with more flexibility but the details will largely vary depending on the plan.
Self-Invested Personal Pensions (SIPPs)
SIPPs allow you to personalise your pension pot. They offer you access to a wide range of investments for your savings. With increased investing flexibility comes more options to tailor your portfolio to your personal situation and goals.
SIPPs can be used alongside other sources of retirement income, which may be helpful if you suspect your pension pot won’t provide enough money.
We recommend being proactive in estimating how much money your pensions will provide. That way, you can find out how a SIPP may fit in with the rest of your retirement income sources.
Aside from SIPPs and pensions, you may have other potential sources of retirement income to consider, including dividends, fixed interest securities and what we refer to as “homegrown dividends”, which we will discuss below.
For investors seeking income from equities, dividends can be alluring—after all, receiving retirement income simply for owning equities seems like a steady way to fund your retirement.
However, dividends are far from predictable. Companies sometimes reduce their dividends or stop them completely due to a variety of reasons, such as reduced earnings. Also note that dividends are just one way to deliver profits to shareholders—some companies don’t issue dividends and instead choose to reinvest profits into the business.
Dividend-paying stocks can be useful for retirement income, but we think your aim should be a well-diversified portfolio rather than one that focuses too much on dividend-paying equities alone.
Many investors like fixed interest securities for two reasons—they tend to offer stable income payments, and, their prices tend to fluctuate less than equities.
What’s the trade-off for stability? Fixed interest securities tend to have lower long-term returns than equities,[iii] but still carry risks, such as:
Fixed interest securities may provide more stability than equities, but they may not provide as much long-term growth as equities. In general, fixed interest securities may still be useful to many investors, but fixed-interest investing is far from a risk-free retirement income strategy.
Another potential cash flow strategy is what we call “homegrown dividends.” A homegrown dividend is selectively selling equities for cash flow. We recommend seeking professional financial advice if you’re looking to implement this strategy as it can have potential tax implications.
Planning for retirement requires a holistic approach—there is no one-size-fits-all solution to meeting your retirement income needs. At Fisher Investments UK, we start by taking the time to get to know you, and then building a portfolio suitable to your goals and needs in retirement. Give us a call and speak with us today to see if a different approach may be right for you.
[i] Source: Gov.uk as of 26/2/2019. https://www.gov.uk/government/publications/your-new-state-pension-explained/your-state-pension-explained.
[ii] Source: Gov.uk as of 26/2/2019. https://www.gov.uk/state-pension/eligibility.
[iii] Source: Global Financial Data, Inc (GFD). Average rate of return from 01/01/1926 through 31/12/2016. Equity return based on GFD’s World Return Index in GBP. The World Return Index is based upon 0GFD calculations of total returns before 1970. These are estimates by GFD to calculate the values of the World Index before 1970 and are not official values. GFD used specified weightings to calculate total returns for the World Index through 1969 and official daily data from 1970 on. Fixed Income return based on GFD’s Global USD Total Return Government Bond Index and converted to GBP.
Investing in financial markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance neither guarantees nor reliably indicates future performance. The value of investments and the income from them will fluctuate with world financial markets and international currency exchange rates.