Increase Your Retirement Income

Are you worried about how much your pension will ultimately provide when you retire? If you are currently in your 40s or 50s, there are a number of steps you could take now to give your income in retirement a boost. Follow our quick guide to some of your options.

With-profits bonds

These are popular with people in the run up to and throughout retirement. You pay a lump sum into your chosen company’s with-profits fund to buy a bond made up of a broad range of investments, including shares, fixed-interest stock like gilts, and even property. On retirement you could withdraw up to five per cent of your original investment each year for up to 20 years with no tax to pay at that time – even if you are a higher rate taxpayer.

With-profits bonds are ignored when the Inland Revenue calculates your income for age allowance purposes if you keep within the 5% withdrawal allowance, so your overall tax bill after 65 can be lower than it would be with certain other investments.

No bonus is guaranteed and investors trying to exit a fund in times of poor performance may be subject to an exit penalty, called a market value reduction or MVR (formerly known as an MVA). This is intended to protect other investors in their with-profits funds by ensuring that departing investors do not get more than the fair value of their investment.

Stock market bonds

If you are nearing retirement, these bonds could be a popular solution. You pay a lump sum for a fixed term – normally around five years. In some cases there is a guarantee you will get your capital back in full at the end of the term, even if shares fall. In other cases there is no such guarantee and you could lose some of your capital. But if they rise, you benefit from the growth, which is paid in a very tax-friendly fashion.

Distribution bonds

These have a higher risk reward profile, however, they are similar to with-profits bonds. So, while their performance may be more volatile, in the good times their returns could be greater, however past performance is not a guarantee to future growth. Distribution bonds pay out an “income” in a very tax-efficient manner and can be useful holdings both before and during retirement.

Individual Savings Accounts (ISAs)

ISAs allow you to build up tax-efficient capital for the future. A husband and wife can invest up to £7,000 each in this current tax year. And, unless the ISA rules are dramatically changed in the future, it should be possible to avoid any tax on your capital growth, enabling you to start withdrawing a tax-efficient income whenever you need it. In the meantime, you still have easy access to your ISA money, should you need it in an emergency.

Venture capital trusts (VCTs)

As their name suggests, VCTs invest in a portfolio of young start up ventures, unlike a traditional unit trust which invests in shares of established companies quoted on recognised stock exchanges. They can offer great tax advantages throughout their life, but are not for the cautious investor.

Property bonds

These give you the chance to take advantage of the growth and income-generating potential from the vast commercial property world. If your existing portfolio already includes shares and fixed interest stocks or corporate bonds, then a property fund could provide additional diversification.