Retirement Planning: for Peace of Mind | Blog | UnaVida Wealth Management Ltd

Retirement Planning: for Peace of Mind

Achieving peace of mind with your retirement planning using the three-pot investment strategy.

This method entails dividing your pension contributions into short-, medium-, and long-term pots, each with a distinct function. We will examine the justification for this strategy and its potential advantages in this post.

Overview of the Three-Pot Strategy

To implement the three-pot technique, divide your pension savings into the following groups:

1. Short-Term Pot:

Cash and short-term fixed-interest bonds are included in this pot. In the early years of retirement, it provides as an immediately available source of funds to cover urgent requirements. Retirees might avoid selling long-term investments prematurely, which might be vulnerable to market volatility, by taking withdrawals from this pot.

2. Medium-Term Pot 

Longer-term fixed-income bonds and managed funds are included in the medium-term pot. It strikes a balance between modest growth potential and capital preservation. Longer-term fixed-interest bonds give stability and predictable income while investments in managed funds offer diversity and professional management.

3. Long-Term Pot:

The majority of the money in the long-term pot is allocated to stock investments. Over the long term, historically, equities have performed better than other asset types. You may gain from capital growth and higher returns by investing a portion of your pension fund in stocks.

The Three Pot Strategy’s Justification

As you get closer to retirement, the three-pot technique gives you a number of benefits:

Safety against market volatility

Your long-term investments will be protected against transient market changes if your pension fund is divided up into separate pots. Your long-term investments can grow unhindered while you take withdrawals from the short-term fund in the early years of retirement, thereby improving returns.

Capital Variations Mitigation

The cash and short-term fixed-income bonds that make up the short-term pot typically have little fluctuation in capital. You can prevent losses when taking withdrawals by taking withdrawals from this pot beforehand.

Bespoke Investment Techniques

Depending on its investment horizon and risk profile, each of the three pots in the three-pot strategy can be managed differently. As a result, you can match your investment plan to your unique financial objectives and risk tolerance.

Additional Points to Consider

Although the three-pot technique offers a strong framework for retirement planning, it’s crucial to take into account additional elements that could affect your financial security:

Inflation:

Over time, inflation reduces the purchasing power of money. It is essential to take inflation into consideration while choosing the right distribution among the three pots.

Life Expectancy:

When planning for retirement, your life expectancy is important. In order to determine your life expectancy and modify your investment strategies accordingly, think about speaking with a financial advisor or actuary.

Tax Efficiency:

To make sure our clients’ retirement accounts are paying as little tax as possible, we check them every year.

The Three-Pot Strategy in Brief

It is wise to divide your pension fund into three pots when planning for retirement. You can protect your investments against market volatility and reduce capital variations by dividing your funds into short-, medium-, and long-term pots. This plan makes sure you have money available for your short-term requirements while letting your long-term assets continue to develop unhindered.

Applying the three-point strategy to your Pension will enable you to withdraw funds without having to sell investments at a loss, increasing your peace of mind while you do so.

Enhancing the Three-Pot Approach

It’s helpful to take into account the funds you choose for your pension and their performance over the past one, three, and five years in order to get the best out of this plan. Due to their ignorance of the stark variations in performance between funds, many retirees fail to do this.

Examine the graphs of the best and worst fund performances from the mixed portfolios with asset allocations of 40/85% bonds and equities to show the stark disparities in performance.

We used FE Analytics, a cutting-edge investment tool that offers detailed data on the fund performance over several time periods, to compare the performance of various funds.

 

The charts are all taken from the IA MIXED INVESTMENT 40-85% SECTOR.  The funds need to invest a minimum of 40% and a maximum of 85% in equities.

 Looking at a 1-year period

Retirement-Planning-3-pot-strategy-1-year-visualOver a 12-month period, the top fund produced 6.57% and the worst fund -3.58%.  A difference of 10.15%!

 


 

Looking at a 3-year period

Retirement-Planning-3-pot-strategy-3-year-visual

Over a 36-month period, the top fund produced 29.84%, and the worst fund -6.19%.  A difference of 36.03%!


 

Looking over a 5-year period

Retirement-Planning-3-pot-strategy-3-year-visual

Over a 5-year period, the top fund produced 46.15% and the worst fund -1.96%.  A difference of 47.11%!

 


 

Having injected the Three Pot Strategy into your Retirement Planning, and chosen your funds based on output from our software tool, your retirement planning is almost complete. To complete the planning you need to ensure that any withdrawals you make are tax efficient.

Tax-Efficient Withdrawal Strategy

  • Take advantage of the tax-free allowance

When you take money from your money purchase pension, most people are entitled to up to 25% tax-free (up to a maximum of £268,275), and the rest is taxed as income.

You can reduce tax by taking advantage of this allowance; that does not necessarily mean that as soon as you retire, you should take all your pension commencement lump sum. 

  • Plan your withdrawals with your partner

It can pay to plan your finances with your other half. You can cut your tax bill by balancing your pension payments and earnings based on your combined situation.

If one of you is a basic-rate taxpayer and the other is a non-taxpayer, the lower earner can transfer up to 10% of their tax-free personal allowance to the higher earner.

  • Before you make pension withdrawals, consider your tax allowances

A sensible thought when managing your income is to take payments in line with tax bands. Those who have a standard personal allowance of £12,570, will normally start paying basic-rate tax (20%) when their annual income exceeds that amount and higher rate tax when their income exceeds £50,271. 

Remember, retirement planning is a complex process that requires careful consideration of all of these factors, linked to your personal plans and lifestyle.

For a Second Opinion on your Retirement Planning, ask for a free demo or book a consultation.

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A pension is a long-term investment that typically cannot be accessed until age 55 (57 from April 2028). The level of pension benefits offered could change depending on the value of your investments (and any income they may generate).

The interest rates in effect at the time you begin receiving benefits may also have an impact on your pension income. The tax consequences of pension withdrawals will depend on your unique situation. In later Finance Acts, tax rates, tax bases, and tax relief may change.

The opinions expressed by Ray Best are meant to inform and educate. Before making any investment decisions always take advice that is pertinent to your investment personality and financial situation.

You are aware that past performance will not necessarily be repeated in the future, but you should be aware that persistent poor performance invariably will.

The value of an investment and the income from it could go down as well as up.

The return at the end of the investment period is not guaranteed and you may get back less than you originally invested.

UnaVida Wealth Management Ltd. is directly authorised and regulated by the Financial Conduct Authority (440577).

The guidance in this website is primarily aimed at a UK audience and is subject to regulation by the Financial Conduct Authority (FCA).

The Financial Conduct Authority does not regulate tax planning, estate planning, or wills and any form of legal documentation.