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Marin talks money listeners. I have exciting news. I have launched a weekly Marin talks money newsletter. The first edition came out last Saturday, a very in depth. Well, maybe not as in depth as some of you might like. Look at the Bitcoin melt up. All the great insights and even better humor than you get here on the podcast. Hard to believe I know, but it is true. The newsletter is for Bloomberg subscribers only. So be sure to sign up at Bloomberg.com slash newsletters or check out the link in the show notes.
Welcome to Merrin Talks Your Money, the personal finance edition of Merrin Talks Money. And these bonus podcasts, and they are a bonus, we talk about the best strategies for making the most of your money. I'm Merrin, some set web and with me, senior boarder and money distilled all the John's, they're back. Hello, John. Hi, man. Exciting times, Bitcoin up, down, up, down. I guess everyone's reading our newsletters. Everyone's really still too, right? Because you talk about it too.
Absolutely. Can't get enough of it. Well, do you know what? It gets me a lot of engagement on Twitter. People keep saying to me, you only post about Bitcoin so you get engagement. And do you know what? It's true. Because it's kind of fun. Anyway, this week, we're not going to be talking about Bitcoin. Well, not on this bit of the pod. Anyway, we are answering another question about pensions. And I don't say another with exhaustion. I know it's very important. And it's something that John and I get questions about all the time.
and we want to make absolutely sure that when it comes to your time to dealing with your pension, you know exactly what to do. So this is the question that John and I get asked possibly the most, apart from, should I buy Bitcoin, but we're not touching that today. Oh, so here it is.
How does pension draw down actually work? You know, we hear a lot about pension draw down about how we're going to take care of our own money and our run up to retirement. That's our accumulation phase. Then we get to our de-cumulation phase. How on earth does that actually work and how best can we manage it? Now, John and I, of course, are brilliant at all sorts of things, hugely knowledgeable. But on this, we have had to pull in an expert.
So here we have Stuart Strauss. Stuart, thank you so much for joining us. Stuart is the co-host of Money, Money, Money on Switch Radio, an author of The Bluffers Guide to Economics. Although, of course, he is not a Bluffer, he is an expert. He was previously a strategist at the European Bank for Reconstruction and Development, but he's also a columnist for Bloomberg Opinion. Stuart, welcome and thank you. Hello. Right, okay, so let's just get right in there. How does pension draw down actually work?
The difficulty with pension drawdown from an ordinary retiree or prospective retirees perspective is that basically all the risk is down to you. So you, you know, unlike having a final salary pension where the money just turns up and you're banking out every month. So nice.
you've kind of got to engineer how the money is withdrawn from your pot and ideally that you don't outlast your pot. That means you take on a lot of risks. So you take on the longevity risks simply that you last longer than your money does, the inflation risk. You've got to have a strategy for investing the money you don't need immediately. The bottom line is you've got to decide on an appropriate level of
drawdown from your fund. So the way you can handle it is the classic thing is some people take their 25% of their pot tax free as a lump sum to go and buy a yacht or a Lamborghini or holiday of a lifetime or more sort of more boringly to sort of pay off mortgages and anything outstanding. They've got prior to retirement and then they put the rest of their pot into what's called drawdown and they decide on a sustainable rate of drawdown
ideally with the help of a financial advisor but a lot of people don't take that route and there are some rules of thumb perhaps we can discuss later to as a guide of what's a sustainable rate but there is one other strategy that combines the tax-free cash and drawing down a regular income because you can instead of taking your 25% tax-free cash all in one go
You can take 25% of each monthly drawdown free of tax. And that allows you to take a much bigger income without running into sort of making yourself a 40% taxpayer in return and stuff like that. And, you know, obviously that's a big challenge in the, in the wake of the budget as well, you know, given the inheritance tax now applies to pensions.
you want to be able to draw as much as you can from your pension if you've been fortunate enough to build up a big pot without paying 40, 45% to withdraw it. Yeah, but the challenge there, Stuart, so many places to go here, but let's start with that. Let's start with that inherited tax point and whether you should take out the 25% it was not always 25% anymore as it is capped.
but that large tax-free amount that you can take out immediately. Now, let's say, let's just say that you hit whatever it is where you can start withdrawing from your pension. It's 55 for some and then going up 56, right? And then is it going to 57 after that? Yes. So it depends on which age you can take it, but you get to that age and you do not take out the 25%, you decide to take 25% of every income payment going forward as your tax-free amount. If you get hit by a bus tomorrow,
everything in your pension now becomes IHT liable. Whereas if you took the whole 25% out of once and gave it to your children, then you would have avoided that but have inherited attacks.
Yeah, and I think you've just hit the nail on the head there, actually, because if you simply take the 25% tax-free cash and leave it in your bank account, economically, that doesn't change anything. But if you gift it, then, yes, absolutely, that's a game changer. So say you're talking about a million pound pot, you can take £250,000 out of that.
and gifted away and your inheritance tax is calculated on the remaining 750,000. Although obviously that is subject, I just want to say quickly before I'm saying that is subject to the seven-year rule. So if you get run over by a bus tomorrow, you're still subject to an hour. Still, still with the same problems. Stay away from buses. Stay away from buses.
Yeah, no, no, you're absolutely right. That at least starts the process rolling. To some extent, the tax-free cash is kind of more complicated as well because that's not inheritable. Do you know what I mean? A lot of tax allowances, especially between husband and wife, are inheritable, but your spouse or whoever you leave it to doesn't inherit your right to tax-free cash. So that's what slightly changes the dynamic a bit.
in some ways it's better to inherit a million pound in ices from somebody, although you lose the tax wrapper you have to take that in cash unless you're a spouse. So you know you can see you're already gets really complicated because you've got a whole load of choices that most people just don't want to have you know they sort of pension freedoms 10 years or so ago gave people a lot of freedom that they didn't really want to want to have.
Oh, that's sad. Okay, wait, let's assume. Here we are. We've decided not to take the 25% upfront. We've decided to leave it in the account and we've decided that every month when we draw our income, 25% of it will be the tax-free part. I'm saying 25% is short-hand, by the way. We do know it's capped. We're just saying 25%. The majority of people it will remain 25%.
That sounds like admin hell. How do you do that? You simply say she'll provide a do this for me, or is there some kind of admin that you are required to do to make this happen? Yes, there is admin required to make that happen. But actually, most pension providers will be able to set you up. So say, for example, you decide to take 25% of each monthly payment free of tax. You can arrange for that to be paid regularly into your bank account with
minimal interference. A problem comes when you have to decide what to sell from within your pension pot to provide you with a liquidity so you can't completely get away from the problem but most people can set it up so that they receive a regular amount into their bank account. The question is whether that's too much and they'll run out of money or too little and now pot will build up and up and up and they'll get hit with inheritance tax when they eventually die.
But when you say they, you're referring to the provider, but let's say, for example, that you hold your sip on a DIY platform. So maybe you hold your hands down or something like that. How does it work then when you say they have to decide what to sell to create the liquidity? And these circumstances, you have to do that yourself. So it's hard work.
You're exactly right. And, you know, I mean, this is a conversation I have with a lot of people is that whilst we may, you know, today, we may all feel on top of our powers and, you know, on top of our game and stuff like that, our appetite for complexity, you know, in our late 70s and 80s is going to be
significantly diminished, even if we've got mental capacity. So, you know, this is one of the problems with things like drawdown. There's a lot of flexibility and a lot of freedoms to do stuff, but most people don't want those freedoms. So you can have it set up so you get the regular income. You can do the regular income, even if you've taken all your tax free cash, it's just you can have a bigger income without paying a huge amount of tax if you take a quarter of each month to pay.
So it might make sense then. I mean, in the accumulation phase, obviously, if you're DIYing in the accumulation phase, it's complicated. You have to give an eye on it all the time, be careful of your investments, et cetera. But you don't have the same type of maths to do. So for most people, is it fair to say that it would make sense if you've DIYed through accumulation, perhaps to hand it over to a platform that will do the money management for you in the decumulation phase?
Yeah, no, I think there's a case to be made for doing that. Another way people handle the complexity as well is that the early years of retirement tend to be pretty expensive. In fact, spending in retirement tend to be a bit of a U-shape. I don't know, you still might have children on the balance sheet and you might want to buy yourself a little present for a lifetime working or something like that or the holiday.
whatever the cause, you spend quite a bit in the early years of retirement. And then you get to a stage where hopefully you're sort of still fairly fit, but you're appetite for sort of trekking in the Himalayas or what to have you is not quite what it was when you were in your 20s. So you're spending goes down a bit. And then obviously the final years, it's a bit of a lottery. You've got care and stuff like that. So what some people do is that they spend sort of
in a more discretionary manner in the early part of retirement. And then when they start to get a clear idea of what their fixed expenses are, then some people buy an annuity to cover just those fixed expenses. And then the rest of the pot is available to be drawn down if they need more money than that. But that's kind of a nice way of giving yourself some certainty at a time when you're craving a lack of complexity in your life.
Okay, that makes a lot of sense. That's a really useful thought. The idea that your retirement spending is, is you shaped. So, let's say, let's say that John, this is the last question I'm going to ask that I'm handing out to you and the long list of questions I know you have about this.
You don't? Of course you do. So let's talk about how we actually invest. So let's say that I am going to stay DIY at least maybe for the first 10 years of my retirement. Maybe I'm only in my late 50s and I'm pretty sure that I can do this myself for the next 15 years or so. Do I just go out and buy a pile of equity income funds or equity income investment trusts? Or is that the wrong approach and I should just go straight into bonds and hold up how the boring bonds forever?
Not that bonds are always boring. There's so much to unpick in that because it's a basic principle of investment. The amount of risk you take is proportionate to your time horizon. So if you're saving a lump sum, I don't know, to pay off a mortgage by a flat, something like that in the next few months, you obviously don't want to take the risk that market crashes and halves your capital. So you take zero risk, your cash or a short dated bond.
But as your time horizon lengthens, and especially once it gets past five years, which at least some of your pension pot will be designed to last for, then it's appropriate to take more risk. And the question is how you take the risk with a pension, because you don't have to pay capital gains tax and stuff like that. You don't actually need to have income generating assets in that you can draw down on the capital gain. So, you know, it's, it's the old thing between being indifferent between
an income and a capital gain. If your wealth is risen by 10%, it doesn't matter whether you've got 10% of dividends or the value of your assets gone up by 10%. So to that extent, you don't necessarily have to restrict yourself to equity income funds on the one hand.
And then you talked about bonds and the natural thing is that as people get older, they de-risk their portfolios, they have bigger holdings of bonds. But there's a massive difference between holding a bond, an individual bond, and holding a bond fund. Because the only way you get the good bits of bonds, the fact that you know what you're going to get when they mature,
and the regular income along the way is if you hold individual bonds to maturity. If you buy a bond fund, you're just a subject to the arbitrary movements and markets as an equity fund would be. People found that to their huge cost in say 2022 when inflation took off, interest rates took off and bond funds got absolutely
crucified. And so it really depends what you're going for. If you've still got an appetite for complexity, then you organize your bonds. So you've got them running off at a regular period, creating a stream of coupon income and final redemption. So you can actually plan what's going on. You can't do the same with a bond fund. It's simply just another asset class that's subject to market movements.
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Okay, so going into bonds by yourself is also very hard work.
Yeah, no, it's very labor intensive. You're doing what a defined benefit pension fund manager would be doing, matching their assets and liabilities, and you have a nice ladder of bonds maturing at regular intervals, and you can have a spreadsheet, or I'm sure there's more sort of exotic software, but from an individual investors perspective, they can see where their income's coming in each month, and they can engineer it, so they get exactly what they want, and they can even do fancy things by
Outside pension wrappers by sort of buying low coupon bonds. So some of the returns in a form of capital gains, but do you sort of mean? Yeah, it's complicated. Yeah, exactly. You're optimizing all the tools you've got at your disposal is mind blowing.
So there's a reason why people do this professionally, right? Yeah, definitely, very much so. The issue between the difference between bonds and bond funds is that a crucial one that even a lot of financial advisors don't seem to grasp.
I think that's really interesting point that Merns cannot grow up. Is there a difference between the accumulation and the de-cumulation phase? I mean, ultimately accumulation can be quite easy.
If you really wanted to, then you can just stack your money, monthly basis, save every month, stack it in, track it, find whatever, but you start in your 20s, you get 40, 50 years before you retire, you can keep your portfolio being virtually the same kind of, you know, between 80 and 100% equity is probably for at least the first 20 years, probably for the first 30, if you want.
And then you don't have to worry too much, but is this becoming very obvious from the conversation? The bit after that is actually really complicated because suddenly your time horizon completely narrows. You're suddenly trying to balance. It's not about saving as much as you possibly can. It's about trying to make sure that you use up as much of the port as you can before you die.
Yeah and you just don't know, obviously you don't know when you're going to die, you don't know what your rate of return is going to be on the stuff that's still in your portfolio. I mean you barely know what your spending is going to be and one thing I've noticed whenever I talk to retired people.
as they are astonished by how much they spend. Even though, I mean, yeah, it's the U-shaped thing, definitely, but it's also, it's a bit like, you know, they're always complaining about how they don't have any time now that they've retired. And then also, you know, they don't have any money either, although they spend more than they expect.
I mean, so from that point of view, do you think there's a good case for even if you've been an independent investor for your accumulation phase of roping in an advisor? And if so, what are the kinds of things you should look for in a wealth manager and maybe how much should you be expecting to pay for that? I know those are all those are both pretty tricky questions, but
I mean, if you go up a rough view when you're thinking there, you're exactly right because accumulation is completely different from de-cumulation and they're all sorts of issues. You've got pound cost averaging on the way in for accumulation up.
you know, works in your favor, you know, very briefly. That's basically the week of the market is the more your regular monthly contributions buy, the more units in funds. The mirror image of that is when there, when markets are really strong, you're buying fewer units. So on average, you're buying each unit at a lower price than you might otherwise have done. It's smoothed things out and protects you against falls. And in fact, if you're really young, a big stock market form might actually be a really good thing.
because you're going to put more in in future than you've done today. So that's the accumulation phase and that's pound cost averaging. What we've just been talking about, what you've been asking about is pound cost.
ravaging. And this is probably where you need the help because, because basically if the stock market, if the stock market falls sharply and you're just about to sort of, you know, if you're say taking your annual income in one go, you know, just to sort of make the, for the purpose of illustration, you're going to have to sell a lot more units in your pension funds to make however much you want to draw down from your fund. And that's where the professional advice can really help. Because if you can take some of the pressure off your pension fund when stock markets are really weak,
give them time to recover as they usually do, that will give your fund a lot more resilience and it's worth paying extra for that. The problem is that basically rather than simply giving you the advice, setting you up with a sustainable plan and letting you get on with it, financial advisors will want to bring all your assets under management and charge you a fee appropriately and that
That's a large part of the reason why people who haven't got enough assets don't interest financial advisors because 2% of nothing is still nothing. Whereas people who've got very substantial assets, perhaps people who've used pensions as wealth management and estate management tools might have many millions in there and 2% of that is a very substantial amount of money and probably considerably more than the advice they get is worth.
so you do get caught in that situation but if
you derive quite a bit of consumer sort of joy, if you like, from having all this worry taken away from you. It's difficult to put a price on that, especially if you're buying peace of mind by getting advice. You can also get free advice as well, pension wise. The take up of these services has been extremely disappointing from a government's perspective and financial advisors are always quick to point out that the take up is quite low.
You can have a free conversation about precisely these sort of issues with somebody who knows how everything works and can perhaps sort of sanity check what your plans are and make a few useful comments on that.
The only other thing I'm just going to ask about was annuities and their role and all this. I know that we can briefly mention that. But again, one of the reasons the pensions freedom came along in the first place is because people got annoyed about having to annuitize and obviously paying annuity, you know, ports all down, etc, etc.
And they're also partly irritated, not just by the annuity themselves, but by being ripped off by the annuity providers, because they were obliged to buy an annuity. So it was partly the system and partly the fact that because they were obliged to do it and they almost always bought them from the same, the provider that they'd been with previously, they were almost inevitably ripped off. So that was a big part of the problem. Sorry to interrupt, John Kerry.
No, I didn't get that in. Yeah. Yeah, because remember, we always just did a little shop alone, shop alone. Shop around, shop around, but nobody did. They got these letters and, you know, it said, take here, they ticked there. And that was that. Madening.
But yeah, no, I mean, obviously then annuities became extremely poor value because of the low interest rate environment. But that's changed now. So in terms of the role of an annuity and checking that you're getting a good value annuity, have you any thoughts on kind of rules of thumb for going about doing that?
Yeah, no, definitely, because I mean, obviously, annuities tend not to, even in good times, tend not to pass on a huge amount, because basically you lose your entire pension pot and you get an income that's only slightly better than you might do from fixed income products as well. But setting that aside,
The changes in inheritance tax will definitely cause more people to err towards annuities now. If you're going to lose 40% of your pot, you might as well get yourself a guaranteed income.
and get away from a lot of the problems we've just been talking about about complexity in an older age. And you can get around that to an extent. You know, we talked about hybrid annuities where you are new at times, enough of your pop to guarantee your fixed expenditure and stuff like that. There are also medical conditions as well. You know, this is shopping around not just to get a better standard rate, but a lot of people will be able to get, if they've got slightly high blood pressure, you know, they're taking
medication for that you know it doesn't have to be sort of at death store or anything like that they'll be able to get a better annuity rate for that as well so it's well worth shopping around there and then going forward you know the whole change in the environment whereby pensions aren't wealth planning instruments will change the sort of
that the way in which people look at drawing incomes down from pensions and that's a huge new area where where work has been done but not a little progress may whereas now this is heavily incentivised progress because for example you know if you lose a big part of your pot on death there is an argument for collectivising death risk a little bit like life insurance in reverse so that if if first sort of a
an actuary or something like that, or a pensions administrator looked at a whole fund for say a particular, say for Bloomberg, for example, and decide, right, in retirement, we can pay this rate largely because some people will die early, some people will die late, and you collectivise that risk, especially now.
Yes. I mean, obviously there are details to sort out there and you'd want to improve confidence in pensions and administration, which is pretty low at the moment. But I would imagine that that is a way things are going to go because people will want better incomes.
than are available from annuities. Yet they are attracted to the certainty and maybe there's a trade-off between certainty and higher incomes there.
All right, I think we better, we better come to a closer, everyone might, might as you get bored of pensions, which occasionally does happen. I had one very, no, not for us, not for us, but I gather there are other people who lose interest. Yeah, no, no, no, it's in you. Final question. There are, we gather, or I gather from weekly news papers at the weekend, quite a lot of people who took that 25%, or not 25%, but you know, we're using it as short a handful out of their pension in advance of the budget.
and now regret it and would like to put it back. And several of the newspaper Q&A money things I read over the weekend suggested that that is possible because of the 30-day cooling off period. If you only took it out just before the budget, you can go, actually, I've changed my mind and you can put it back. Is that correct?
That's absolutely correct. Basically, whether you should regret an inverted commas taking your tax free cash largely depends on what you do with it. So if it's just sitting in a bank account, you've lost the tax wrapper for it, the ability for those funds to grow capital gains. So you'd probably be better off putting it back using the cooling off period. But again, if you're trying to do this as part of your estate planning,
withdrawing the tax-free cash and gifting it and taking your seven-year rule chances is probably still the main strategy. So it depends what your motivation for taking the money out in the first place was what the best strategy is for now. If you were just taking it out and parking it in a bank account, you might as well put it back. And of course, the other thing says that just because you didn't change the rules in that budget doesn't mean she isn't going to change the rules.
Yeah, no, I think sort of going forward is perhaps a little less likely because she's kind of acknowledged the tax-free cash thing as a thing. But you're absolutely right. I mean, basically, if you take 40 billion out of the economy, growth isn't going to
exceed expectations wandering out of my lane here. Just in case there is anybody out there who did take the money out and is thinking about putting it back, do be very, very careful because you don't want to fall foul of any of the rules where you're not allowed to put much in after you've taken some out because you could end up with a really nasty tax charge if you get that wrong. So if you're going to do it, take advice, make sure you get it right.
And I think that's it. Unless anyone has anything else. Super interesting to hear about pensions. No, who could have guessed? Right. Thanks for listening to this week's Marian Talks Your Money. If you like our show, rate, review and subscribe wherever you listen to your podcast. Also, be sure to follow me and John on X or Twitter at MarianSW and John Underscore. If you've got a Twitter handle, you would like to add in at this point.
Yes, it's App Pension Man UK. Okay, follow App Pension Man UK as well. I do and John does. This episode was produced by Samasadi, production support and sound design by Moses and questions and comments on this show and all our shows are always welcome. Our show email is marinmoneyapploonberg.net. You've just heard us answer one question or many questions in one actually if you have a question do send it to us and we will try and
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