If you are wondering what to do with cash from your pension once easy access pension rules let you draw down your cash to spend as you like, take a look at a new video that explains how to invest for income.
Developed by The Association of Investment Companies (AIC), the short animation explains how buying shares in investment funds can generate income during retirement.
The AIC, which is a trade body for investment companies, argues that many investors can earn a better income from these investments than from other options vying for their cash.
According to the video, investment firms have three benefits for anyone investing for income:
- Options to smooth tax by holding back excess income in good times and paying out more in leaner years.
- Most investment companies can offer a wider range of assets that generate better returns than pension funds, so can pay a higher income. Assets would include commercial property, eco projects and infrastructure.
- Investment funds pay income from trading assets as well as dividends
AIC spokesman Annabel Brodie-Smith said: “The forthcoming changes in the way people can manage their pensions will trigger options for many to earn more from their savings by switching investments.
“Investment companies are a natural choice for many of these investors because they can give them a balanced portfolio with higher yields.”
Brodie-Smith warned that investment companies are not a suitable alternative for pension savers who cannot afford to lose capital or need a guaranteed income.
Although many retirement savers have indicated they will take advantage of the early access pension rules to drawdown their cash, they need to run the numbers before taking on their funds.
Fees and charges
It’s OK to switch from a pension to an investment fund offering a higher yield – but that comes at a higher risk and some times that extra income promise is wiped out by the income tax an investor pays on drawing down on their pension.
Besides the tax, some pension providers may add fees to the money you take as well, and all these charges will take time to pay back.
A higher yield does not necessarily mean more cash in the bank when tax is taken into account.
Also, many self-invested personal pensions (SiPPs) already offer the same investment benefits as AIC members. In fact, many AIC firms offer their funds on investment platforms under funds marked up as ‘inc’ for income.