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I’ve just cut and paste this from an article received from A J Bell yesterday, Sunday 29/11/2020.  It’s a little late into the pandemic but I agree with most of the content.

1. Can you use other income sources to tide you over?

If you take taxable income from your pension, your annual allowance will reduce from £40,000 to just £4,000 (the ‘money purchase annual allowance’ or MPAA). This is one of the main reasons why you might avoid taking taxable income from your retirement pot. If you have money saved in an ISA, for example, you could consider taking this out tax-free, while also keeping your full pensions allowance intact.

2. Take your tax-free cash first

Note that the MPAA only kicks in if you take taxable income from your pension pot. So if you have no other options open to you, taking only your tax-free cash will at least leave you more flexibility to rebuild your retirement fund later on.

3. Do you have a plan?

If you have been forced to access your pension early – or are planning to in the coming months – spend some time thinking about how you can rebuild your fund once your income bounces back. It might be that you need to pay more in as a result to get back on track, or consider working a bit longer. But whatever you do, don’t stick your head in the sand.

4. Sustainability is the key

For those who have already stopped working and are taking a retirement income via drawdown, it is vital to review withdrawals regularly to make sure they remain sustainable. These reviews should happen at least annually, and you should be prepared to potentially reduce your income if your investments suffer significant short-term falls (as we saw in March and April).

5. Consider a ‘natural income’ route

A ‘natural income’ retirement strategy involves living off the dividends your investments produce, thereby preserving the capital value of your underlying fund, allowing it more time to grow. While a natural income strategy has been particularly difficult in 2020 as swathes of companies have cut dividends, positive vaccine news could mean it is more viable in 2021 and beyond.

Summary

I struggle with the last point on a ‘natural income.’  If this were for your main source of income, you would have to be able to manage significant variation in income yields, particularly at the moment.  This would work for a secondary income, a top up income from, for example, a Stocks & Shares ISA portfolio.

From my point of view, I advise all clients to build at least three different assets to help manage risk and aid tax efficiency in retirement; cash deposits, Stocks & Shares ISA portfolios and pension funds.

If markets drop as they did in March and your pension fund values follow, you can then switch your Drawdown pension income off, start to draw on your cash deposits to cover living costs and wait for the market to recover.  This will help you protect your pension assets for the long term.  As the markets recover, you can start your Drawdown pension income, perhaps at a lower level initially.

When markets fully recover, you can use your Stocks & Shares ISAs to top up your cash deposits.  Your Stocks & Shares ISAs and pension funds remain invested and recover in value so that you are fully prepared for the next shock to markets – hopefully, a good long time away.

Any guaranteed income you have, for example State Pensions, will help through volatile periods.

Take care.

Steve Speed

30/11/2020