Category : Investment funds

Using income drawdown to quickly withdraw your pension funds

Posted By: Phil Handley DipPFS AwPETR On February 25, 2015 Category: Investment funds Pension drawdown UFPLS

An advantage of the new pension reforms in April 2015 is to have full access to your pension savings. The obvious disadvantage however is the potentially large income tax bill. 25% will be allowed tax free still, however any of the additional 75% withdrawn will be added to your income tax bill for the year. Those with larger pension funds therefore face a choice. Take it all out and pay higher rate tax (40%) and potentially additional rate tax (45%) on some of the income or withdraw it over a number of years.

The current income tax thresholds are as follows.

tax tables drawdownTherefore any pension fund withdrawn above £41,865 (assuming no other taxable income in the year) will be charged at 40% and additionally at £150,000.

Clearly this wouldn’t be the most tax efficient way of withdrawing funds so what are the alternative options?

Uncrystalised Funds Pension Lump Sums (UFPLS)

This allows you to stay within your existing pension scheme and take ‘chunks’ of money out when required. 25% will be taxable with the remaining 75% charged against income tax. Read our blog on UFPLS for more information

Pension Drawdown

This is where consideration needs to be taken. If the sole intention is to withdraw funds as quick as possible but stay below certain tax thresholds,  care should be given to the choice of investment vehicle. Income drawdown has traditionally been an investment based product,  and as any good financial adviser will tell you, investments should be considered for a minimum of 5 years. Therefore if your fund size is such that you’ll depleate it before this time frame,  the usual investment based approach may be risky.

Investments fluctuate in the short term (up to 5 years). If there is a particularly uncertain period in the stock markets the 5 years after you retire, the value of your pot may be seriously depleted. The advantage of holding investment over the medium to long term should allow for short term fluctuations to be ironed out. Look at this chart of the FTSE 100 since 1985.

FTSE 100 pension drawdown

This highlights the general growth over the medium to long term. However,  there are short term periods of massive decline. The year 2001 to 2003 and the more recent crash of 2007/08. Although pension freedom wasn’t available during these periods anyone with a FTSE 100 fund, who may have adopted a short term withdrawal strategy during this time,  would have seen the value of their funds almost half. Note that following these periods however in the medium term the markets ‘bounced back’. Although this chart solely illustrates the FTSE 100, global markets followed a similar pattern.

An investment based approach with a large equity content could therefore be a risky strategy. The other alternative is to use the flexibilities income drawdown provides,  but choose a more cautious approach.

Funds that contain a higher weighting to perceived ‘less risky’ asset classes like gilts and bonds could be one method, however are still exposed to volatility.

This chart from monevator.com shows the volatility of the main asset classes taking into consideration inflation.

Volitility pension drawdown

It highlights that the least volatile asset class in the short term is cash. If you are wanting to withdraw a similar amount to your starting fund value this is the most likely option.

Cash based drawdown is available through many providers,  either in a Deposit Based fund or Money Market funds which can provide a slightly better performance but are a step up in volatility. Cash doesn’t carry investment risk but does carry inflationary risk meaning the real spending power of it will decrease over time if the interest rate isn’t as high as the increase in the cost of living, usually measured by the Consumer Price Index.

Consideration therefore is paramount when deciding which type of investment your remaining drawdown fund should be placed into. If you are taking financial advice make the withdrawal period clear to your adviser. If you are choosing to set up and manage a drawdown plan yourself, carefully consider the volatility of your chosen investment against the time period of withdrawal.

Pension drawdown funds you probably should have avoided!

Posted By: Phil Handley DipPFS AwPETR On January 26, 2015 Category: Investment funds Pension drawdown

Tilney Bestinvest the leading UK investment and financial planning firm has released its bi-annual report into the worst performing investment funds those who wish to build a drawdown portfolio should have avoided.

With the shift from annuities to pension drawdown gathering pace there is a new wave of potential investors who once would have never been the target market for fund manager. The ongoing bull market has strengthen appetite for equities and managed funds after a bruised level of confidence immediately post financial crash.

Rising markets have given even those with poorly managed funds a decent return, but how well could they have done with a little more research or with good advice? Bestinvest have looked at the Dog funds you would rather have sent off to the kennel.

They have looked at 60 funds and ranked them solely on statistical data relating to poor performance against their benchmark. The funds must first have failed to beat their benchmark over three consecutive years but also under performed their benchmark by 10%.

Their research is broken down into geographical regions for the analysis.

In the doghouse of the UK smaller companies sector is SF Webb Capital Smaller Companies Growth which has a -67 relative 3 year % return. This is against the sectors best worst performing fund Liontrust UK Smaller Companies with a 4% positive 3 year return, highlighting that this sector hasn’t been relatively positive during this timeframe. If you’d have been in these funds with your income drawdown plan and making withdrawals, the negative returns would be compounded shortening the sustainability of an income into later retirement.

Europe faired a little better as an area to diversify into with the worst returning fund Neptune European Opportunities showing a -17% return over the 3 year timeframe. The best worst, JPM Europe Dynamic (ex-UK) GBP Hedged, barked its way to 24% over the 3 years.

A sector which gives excitement to some and send the fear of god into others is emerging markets. Again with hindsight you probably wouldn’t have wanted these funds in your pension drawdown portfolio. FP HEXAM Global Emerging Markets would have diminished its value by -37% over 3 years whilst Lazard Emerging Markets would have given you the best worst outcome with 0% growth.

Probably the best performing sector is the US equity markets which have, in recent years defined the term bull market. If your fund hasn’t performed in this sector you’d probably be wanting to make a direct call to your fund manager. IFSL Harewood US Enhanced Income was the worst performing over 3 years with a -18% decline whilst Dodge & Cox Worldwide US Stock would have been the best of a bad bunch with 6% over 3 years.

Looking at the individual investment houses Neptune and Aberdeen had the most funds in the doghouse whilst M&G were responsible for the largest proportion of clients’ money not performing.

You can download the full report from investment expert’s bestinvest here

What investments are in a drawdown investment fund?

Posted By: Phil Handley DipPFS AwPETR On January 15, 2015 Category: Investment funds Pension drawdown

The main purpose of using investment funds over single company shares is to minimise risk. It’s commonly called diversification but the concept is the well-known phrase not putting all your eggs in one basket.

There are a number of ways in which an investment fund spreads the risk.

Geographical region

There are opportunities to invest for growth in every part of the world. Some economies are more developed such as North America, UK, and Central Europe. The larger companies within these area should be more predictable and therefore less volatile. There are also less developed markets such as India, parts of South America and Africa and part of Asia. These are known as emerging markets. They carry more risk in terms of volatility but can provide great potential returns (or losses).

Different regions offer different opportunities and associated risk. A global investment fund will have a mixture of these so that if one area is affected others may mitigate that risk.

There are often region specific funds also. These will be focused on a specific geographical region for example UK equity. This fund will be more specialised in this area and theoretically should be able to offer better growth. This is because the research team will be located in this region and have a better understanding of the opportunities, company value, competition and market forces which may provide growth potential.Regional Diversification

Rather than investing in one global fund, a portfolio may contain 5 funds which have specific regional funds within it. The theory being investment managers of the region specific funds will have more of a handle on their market than one global fund manager, who can’t keep track on all things in all regions.

The advantage of choosing to build a portfolio from region specific funds is the ability to exclude regions which you may have a desire to avoid. The recent turmoil in Russian being one example.

Sectors

As well as spreading the risk between different countries, fund manager will also invest in different sectors. Different sectors offer opportunities for different growth potential. There are established sectors and new sectors. Banking for example is an established sector where as some healthcare sectors like biotechnology are rapidly advancing, technology lead new areas. A global fund manager will diversify in sectors as well as countries, but just like there are regional funds there are sector specific funds.Sector Diversification

There are healthcare, technology and financial specific funds just to name three. Again the advantage of these type of funds is they can be more specialised in a specific sector. The research will be focused within this area and therefore more knowledge should be available to the fund manager than a simple global fund.

Diversifying into different sectors will again reduce risk to a fund. If one sector is under pressure, it won’t necessarily impact other sectors and there the overall impact could be diluted.

Asset class

The third way in which a portfolio is diversified is by asset class. These are groups of investment which have a common link with risk and performance. The four main asset classes are Equities (shares), Commercial Property, Gilts/Bond and Cash.

Shares carry the most risk but offer the greatest return potential, these are direct investments in a company and are traded on stock markets. Supply, demand and perception of a company’s strength will have an impact on the performance of their share price.

Commercial Property may be a fund which buys offices or commercial space such as shopping centres to rent out. Value will be determined from property price movement and rental return of the underlying investment.Asset Classes

Bonds and Gilts are loans to companies or Governments for a given return. A company will generally pay a higher annual return than a government as they are more at risk of defaulting. These types of investment offer a more steady return (often referred to as fixed interest) as they pay a known interest return. These can also be traded however and if deposit interest rates are low, a high yielding bond will be more attractive as a better interest can be achieved from that than putting money in a bank account.

Cash is the least risky of the four asset classes. The returns are somewhat predicable, have low volatility but offer the lowest potential return. Cash is simply that, a cash deposit with an institution which will offer an interest rate if you deposit it with them, much the same as your bank account would.

Summary

The percentage invested in each of these areas will be determined by your attitude to investment risk and how long you wish to keep your money invested. You should always assess you risk profile before choosing a selection of invests. If you are unsure as to whether drawdown is right for you we like Fidelity’s Retirement Option Tool. If you like the idea of drawdown and wish to know what types of investment you should be looking at, Standard life can help you assess your attitude to investment risk. If you take financial advice your adviser will do this through questioning and the use of some tools.