I have been invested 100 per cent in cash since setting up my income drawdown plan six years ago. I take about 50 per cent of the maximum pension. My wife who does not have any personal income. I also have two children who flew the nest many years ago.
I am 71 and need some advice about altering investment strategy while taking minimal risk. I also need to know whether pension simplification may give me some other options. What would you advise?
From the information provided, you seem to be a highly cautious investor and I would question whether income drawdown really suits your risk profile.
The main benefits to you of setting up the drawdown plan would have been to achieve income flexibility and tax-efficiency together with the benefit of a lump sum payable on death of the balance of the fund less tax at 35 per cent.
To date, you have not taken great advantage of the ability to exercise the opportunities that are available to you under a drawdown plan. Over the last few years, the cash fund would have provided you with low levels of returns in what can only be described as highly volatile markets. With the level of income you are taking, it is likely that your fund is gradually eroding.
As a broad rule of thumb, we would recommend that an investment portfolio for drawdown be made up of a selection of investments chosen from cash, fixed interest, equities and property. The level of investment in each area and type of funds selected would be largely dependent on the client's attitude to risk, as well as immediate cash and income requirements. The investment selection would be reviewed at least once a year, with rebalancing of the portfolio being carried out where necessary to ensure that the necessary degree of diversity and risk was maintained. An annual review would also ensure that changes in personal circumstances and health could be taken into account.
With a big lump sum of money invested in cash, any changes to your investment strategy would need to be undertaken gradually. Even the less volatile funds you might consider, such as property and fixed interest, are going to expose you to some degree of risk, without necessarily increasing greatly your potential for growth.
As an alternative, you may wish to consider using part or all of your funds to buy an annuity which will provide you with a guaranteed level of income. You can elect to include a spouse's pension which can represent up to 100 per cent of the pension payable to you and can also include a guaranteed period of up to 10 years to ensure that the maximum amount possible is payable on your death.
By utilising only part of the fund for the annuity purchase and taking a minimum level of cash from the funds remaining in drawdown, you may still be able to ensure that benefits are payable to you in as tax-efficient a manner as possible while preserving some of the death benefits which may be of some importance to you in passing on benefits to your children. In April 2006, you will have the opportunity to reduce your income payments under the drawdown plan to nil, at least until you reach 75.
The drawdown plan has provided you with the ability to take your income in a tax-efficient manner and under current legislation will continue to do so until you are 75. Under pension simplification from April 2006, in addition to the option of buying a guaranteed annuity, you will be able to continue drawing an income direct from the fund using the concept of an alternatively secured pension. However, this is more restrictive and the maximum income which can be drawn is 70 per cent of the income available by using the open-market option. On death, if your wife survives you, the fund must be used to provide a dependant's pension.
In the event of your wife pre-deceasing you or on her death, the scheme may be able to reallocate your pension fund to one or more members of the same scheme from which your benefits are being drawn.
The beneficiaries may be nominated by you or, in the event of a nomination not being made, can be selected by the scheme administrators.
Alternatively, you will also have the option of nominating a charity to receive your residual fund.