Routes to Retirement

By London & Capital | 16 Nov, 2018

The nature of retirement is changing. Those now approaching retirement often have a strategy largely unchanged from the inception of their pension plan, and this may not have been designed to meet the needs of the modern retiree.

Developments in lifestyle and medicine mean people are living longer, with those over 100 years old, now the fastest growing age group. This means people can often expect to spend 20-30 years in retirement, adopting different lifestyle patterns. These changes need to be reflected in the way retirement
income is managed.

Pension freedoms have undoubtedly brought greater flexibility and choice for retirees.  However, without the proper advice and planning, that choice is not without its downside. This is where wealth managers can step in; discussing your lifestyle goals and working with you to make sure that your lifestyle requirements and pension plan are aligned.


A Self Invested Personal Pension (SIPP) or drawdown portfolio is a portfolio of investments in a strategy  designed to take into account regular withdrawals in order to form an income.


There are several reasons as to why someone would want to use a SIPP as opposed to their Defined Benefit (DB) Scheme, especially in the run up to retirement. A SIPP offers a more tax efficient way to save for retirement, particularly if you are reaching the tax free limit of your pension contributions. It also offers a more flexible solution than a straight forward pension pot as people are now more likely to phase their retirement or start new businesses. In the last 15 years, the number of those aged 50 to 64 still working has increased by 60% to 8 million. The number of those aged 70-74 still in employment has doubled in a decade. In this case active management of a SIPP is essential as the investment strategy can be much more easily adapted to your needs, whether they be saving for the next phase of retirement or making withdrawals to form an income.

Retirees are also being offered increasingly attractive transfer values to ‘opt out’ of DB schemes at  retirement. The problem for those who choose to transfer is that they will now carry the burden of future pension provision. They are responsible for ensuring that their pension pot is appropriately invested to provide a sustainable income that may need to last for over 30 yrs. At the same time, even if a retiree is comfortable managing that pot initially, will they have the same inclination in later in life? Will their spouse? Will their children?


  • Transfer value – Relevant for transferring out of a DB scheme, the transfer value will be unique to every pension. It will depend on the strength of the company providing the pension, the prevailing interest rate, plus the nuts and bolts of the individual scheme. It may include spousal provision, for example, or a guaranteed period.
  • Potential market returns – The past decade has been strong for asset class returns, as loose monetary policy has buoyed equity and bond markets alike. This has flattered the returns from SIPPs. However, any transfer decision needs to take into account that these returns may not persist into the future.
  • Enhanced annuity – Those with specific medical conditions, such as diabetes or asthma, may be entitled to an ‘enhanced’ annuity because of their potentially shorter life expectancy.
  • Alternative income – In sacrificing the guaranteed income available from an annuity, it is necessary to consider how else to generate that income. Will it be inflation-protected? How stable is it? Can the income grow over the longer-term?
  • Your goals and how you intend to use your money – Do you need all your income up front? Or do you only need a small amount to supplement income from part-time work? Or a business? Do you want more of your
    income early in retirement so you can travel? Or would you rather keep some aside in case of care fees?


If managed correctly, there are real opportunities in creating a SIPP. Income can be drawn as required, which is likely to be more tax efficient. Unused wealth remains invested for potential growth, possibly securing a higher income in the future. SIPPs also attract more favourable inheritance tax treatment and therefore offer the ability to cascade wealth down the generations. In general, a SIPP will give greater flexibility over your retirement income and it is easier match income to your needs. In order to take full advantage, you will need to bear in mind the following:

1. Poor preparation

When all investors used to buy an annuity at retirement, the progression of investments in the run-up to retirement was straightforward. As a person nears retirement, investors would progressively de-risk their portfolio until it had a majority weighting in government bonds (an option with fewer growth opportunities, as need to take risk decreases). However, a SIPP is more is likely to remain invested in higher risk assets such as equity, so investments can potentially grow whilst an income is withdrawn. Greater consideration needs to be given to the investment of the underlying funds during the transition period into retirement. This decision can’t simply be made at retirement. A recent survey has found that legal firm partners are an example of those who are unprepared for retirement and need more support in this area.

2. The need for flexibility

A significant advantage of a SIPP is its flexibility. However, the portfolio needs to be managed properly to take advantage of this. There is a danger that tight parameters which to provide security and longevity of income, in which case investors may have been better off with an annuity. To our mind, a SIPP must incorporate the following features:

  • Allow flexibility
  • The ability to switch income (withdrawals) on and off
  • Ensuring tax efficiency of income

This is likely to require ongoing active investment management to ensure that the portfolio remains
appropriate to both market conditions and individual investor needs.

3. The problem of longevity

Most people live longer than they plan. A recent report by the Institute of Fiscal Studies showed that people in their 50s underestimate their chances of reaching 75 by around 20%. It is only as they hit their late 70s and 80s that they start to become ‘mildly optimistic’ about surviving beyond 90. There is the possibility that the next generation of retirees need their pot to last twenty-five or thirty years. This has a number of implications:

It means that investors need to take sufficient risk to combat inflation – over five years, investors can run the risk of moderate inflation. Over thirty years, inflation at just 1-2% could create meaningful erosion of your day-to-day income available after retirement.

  • Combating inflation effectively may mean you need to include risk assets in a portfolio – this is likely to include stock market investment, which brings a number of associated risks.
  • You are likely to require ongoing advice particularly in later years – this may bring additional cost. It is also worth considering whether a spouse may need additional adviser support if they are less comfortable with investment.
  • There is the potential to run out of money – an annuity is a guaranteed income for life, whereas drawdown portfolios always have the potential to run out.

4. Sequence risk

A fall in investments just as retirement starts – from poor investments or a market crash – can have a disastrous effect on long-term wealth. Recent statistics from Royal London showed that losses in the early years of retirement, particularly when their fund value is high, can be hard to recover. Investors then have a smaller pot from which to withdraw income and therefore may need to dip into their capital to sustain their lifestyle.

This ‘pound cost ravaging’ becomes cyclical and can see a pension pot erode quickly. There are solutions to this problem, but it shows that where risk assets are incorporated into a SIPP, they need to be actively managed.

5. The need for income

High and sustainable income is difficult to achieve while interest rates are low. While the direction of interest rates may be changing as monetary policy direction shifts, it is likely to be slow and gradual. The bond market does not expect UK interest rates to rise above 2% at any point in the next decade. Therefore, expectations on the income available from investments needs to be realistic. At the same time, income must be sustainable and organic, rather than artificially pushed higher in the short-term at the expense of long- term growth.

6. Cost of advice and investing

The cost of management is a vital consideration when managing a post-retirement portfolio. The difference between 1% and 2% in terms of a drag on investment returns is significant over a 20-30 year retirement  horizon. £100,000 growing at 5% over 25 years would be worth £348,129 at the end of the period. If that same pot grew at 4%, it would be worth just £271,376. Small charges mount up.

7. Care costs

Around one in six over 85s live in care homes. Care costs cannot be fully planned for – the majority of people won’t need it and therefore to reserve significant sums may be unnecessary. However, for those who do need it, it is a vast expense and can erode wealth built up over a lifetime. The latest LaingBuisson survey found that average nursing home costs are now £1,000 a week and this can be far higher in London and the South East. The government provides little support for those with the means to pay. If the time comes, retirees need to give careful consideration to all the resources available to pay fees. This may include houses, pensions and ISAs. They also need to consider the relative merits of options such as equity release. When weighing these options, careful consideration will need to be given to the inheritance tax implications and the wishes of the individual.

8. Spousal provision

Even if the primary pension owner is comfortable managing wealth in retirement, there is always the question of what happens if they die first. Annuities connected to a DB scheme will often give a predetermined spousal provision, whereby the spouse will continue receiving an income after the death of the main annuity holder. This is relatively straightforward and can be a great comfort to those who are left, who may not have experience of dealing with investments.

For those who choose a SIPP in retirement, it is more complex and should prompt a review of the right options. For example, is this the right time to buy an annuity or whether there still merits in drawdown. Can the spouse be made comfortable with investment? Again, the cost of ongoing advice needs to be balanced against the flexibility and potential growth in a SIPP.


Although it may seem daunting, the financial freedoms and flexibility which can be gained through a SIPP are extensive when supported by thorough and considered wealth management. Ensuring that your advisor takes a holistic approach and knows your goals, desired lifestyle e.t.c. when planning for retirement is essential. This can be maintained by regular contact with your wealth manager to review your portfolio, make sure it is in tune with your needs and answer any concerns you have.

In my view, an active investment management approach is imperative as the consistent oversight means that the manager can adapt to the client’s changing needs throughout retirement and can guard against market downturns and protect your wealth over the long term.

To speak to a member of the London & Capital team, please give us a call on +44 (0) 207 396 3200 or alternatively an email

The value of investments and any income from them can fall as well as rise and neither is guaranteed. Investors may not get back the capital they invested. Past performance is not indicative of future performance. The material is provided for informational purposes only. No news or research item is a personal recommendation to trade. Nothing contained herein constitutes investment, legal, tax or other advice.

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