Nowadays, we tend to live in a ‘buy now, pay later’ culture which can suit most financially comfortable people whose income from employment allows them to do this. However, as we get closer to retirement age, many of us start to realise that once we retire from work, our pension provisions may not be adequate to fund the kind of lifestyle we want.
If you are in your 40s or 50s and you are concerned about whether or not your existing pension provisions are going to be sufficient, there are a number of steps you can take now to give your income in retirement a boost.
These are popular with people who are approaching retirement age and throughout the duration of their retirement period. You opt to pay a lump sum into your chosen company’s with-profits fund to buy a bond consisting of a wide range of investments, including shares, property and fixed interest stock such as gilts. On retirement, you are able to draw up to 5% of your original investment each year up to a maximum of 20 years. After that period, you have no tax to pay even if you are a higher rate tax payer.
With-profits bonds are not taken into account when the Inland Revenue calculates your income for tax allowance purposes if you stay within the 5% withdrawal allowance. Therefore, your overall tax bill after you turn 65 can be lower than it would be with other investments. However, you are not guaranteed a bonus and investors who want to pull out of a fund if it’s not performing very well can be subject to an exit penalty known as a ‘market value reduction’ (MVR). This is designed to protect other investors in their with-profits funds by making sure that investors who do want to pull out do not get more than the fair value of their investment.
Stock Market Bonds
You pay a lump sum for a fixed term which is usually about 5 years. In certain instances, you are guaranteed to get your capital back in full at the end of the period even if shares fall. In other cases, there is no guarantee and you end up losing some of your capital. If they rise, however, you benefit from the growth which is paid out in a tax efficient way.
These involve a higher element of risk but are similar to with-profit bonds. While their performance can be unpredictable, their returns can be greater but it’s important to realise that past performance offers no guarantee of future growth. Distribution bonds pay out an income in a very tax efficient way and can be useful holdings both before and during your retirement.
Individual Savings Accounts (ISAs)
ISAs enable you to build up tax efficient capital for your future. A married couple can invest up to £7,000 each in this current tax year. Unless ISA rules are changed dramatically in the future, you should be able to avoid any tax on your capital growth which will enable you to withdraw a tax efficient income whenever you need it. Meanwhile, it still allows you to have easy access to your ISA money if you needed it in an emergency.
Venture Capital Trusts (VCTs)
VCTs allow you to invest in a portfolio of young start-up venture companies, unlike a traditional unit trust which invests in shares of well established companies quoted on recognised stock exchanges. They offer great tax advantages throughout but their performance is more unpredictable.
These give you the chance to take advantage of the income generating potential and growth from the commercial property world. If your existing portfolio already includes shares, corporate bonds and fixed-interest stocks, then a property fund can tie in well with these and allows you to have a diverse portfolio.
It is always a good idea to seek professional advice from an Independent Financial Advisor before entering into any of the schemes outlined above as they can tailor a suitable plan to suit your specific circumstances. The Financial Services Authority (FSA) has a list of reputable advisors all over the UK.
Of course, you may not be in a position or you may not wish to consider any of the schemes above. In that event, another method of topping up your pension fund would be to make Additional Voluntary Contributions (AVCs) on top of your normal contributions to increase your pension fund for retirement. Further information about this can be found at the Department of Work and Pensions website.