Retirement Income Strategies: Investments, Annuities, and Tax Efficiency

Investors must diversify income sources in retirement to combat inflation and ensure financial stability.

### Generating Reliable Retirement Income: Strategies for Inflation and Tax Efficiency
* 💼 During working life, employment typically provides **income**, but in retirement, individuals must manage **income from investments**.
* 📈 Key investment types for generating income include stocks, which provide **dividends**; bonds, which offer **coupon payments**; and real estate, which can yield **rental income**.
* 🏢 Real estate investments can be direct, like buy-to-let properties, or through funds such as **REITs**, which offer **diversified exposure to commercial real estate globally**.
* 💡 Diversification of income sources is crucial to mitigate risks; relying solely on one type of investment, like **UK stocks**, may expose retirees to **income volatility**.
* 📊 Matching income growth with inflation is essential, as the average UK inflation rate has **exceeded the Bank of England's 2% target**, affecting **purchasing power over time**.
* 💰 Annuities provide a **fixed income stream** in retirement, with various options available, including **escalating and inflation-linked annuities** to address **inflation concerns**.
* 🔍 Tax efficiency is key in retirement planning, with differences between **ISAs and SIPs** affecting how income is taxed; strategic withdrawals can help **minimize tax liabilities**.
* 📅 Lastly, checking eligibility for the UK State Pension is important, as it offers a **guaranteed income that increases with inflation**, ensuring **financial security in retirement**.

During our working lives, we often rely on our employment to generate our income. In retirement, we'll have to manage our income ourselves from our investments. In this video, we'll look at ways to generate that income, ensure it's reliable, grows in line with inflation, and is tax-efficient. Today's video is sponsored by Wisdom Tree, one of the leading ETF providers globally. Let's begin by looking at some of the types of investment that generate an income. The first one is stocks, where you buy shares in a company. Those shares generate dividends, and then you get paid those dividends into your brokerage account. You can then take them out and put them into your bank account, and that can be your income. Another choice might be bonds. For example, you could buy government bonds, you could buy corporate bonds, and again, these generate income in the form of small payments called coupons. You can think of these as interest on the loans that you're buying, and of course, when the loan comes to term, you'll get your principal back. And the third asset class that people often

use to generate income would be real estate. Now, you could buy individual buy-to-let, so you buy a house, you rent it out, and that generates a rental income. Or you can buy it in the form of a fund where it buys commercial real estate and pays you the rent on that real estate. Now, all those three types of investment can also be bought in the form of a fund. I mentioned REITs, real estate investment trusts, and you can see, for example, here diagrammatically, we've got lots of properties. Those are individual commercial real estate investments, and those have companies which pay rent. For example, it could be a shopping center, and then that income is accumulated and paid out to the holders of the fund. The beauty of buying a fund is that it's diversified. So, for example, here you can see a real estate investment trust index which is tracked by several funds, and notice how it buys real estate in multiple countries. Now, if you bought a buy-to-let in your country, then it'll be tied to the fortunes of your country.

legislation in your country, and it won't be diversified. Whereas, you can see that this index and the funds that track it are globally diversified. So, while we often talk about diversification of our portfolios in order to spread the risk, what we don't often talk about is diversification of income sources. For example, if you generate your income only with stocks based in the UK, then it might be that UK stocks pay less dividend in the future. Whereas, if you have diversified income streams, it's unlikely that all those forms of income would be falling at the same time. Now, retirements could be very long. Some of us live to 100, so you could be looking at many decades where you have to match inflation. In fact, I'd say that's the real difficulty in generating an income in retirement: can you match inflation and the increasing cost of living? For example, here you can see UK inflation going back before 1990. The top panel you can see here is the UK consumer price index that measures inflation based on a

basket of typical consumption in the UK. On the bottom panel is the annual change in that index, and that's what we usually see quoted in the news. Now, the dashed yellow line you can see in that bottom panel is the Bank of England's target, which is 2%. And while it does try to meet that target, it often fails. So, the average rate of inflation for the UK over this period is a little bit above that 2%. But your job as an investor is to match that rate of inflation; otherwise, in real terms, your income will be falling, its buying power will be decreasing over time, and that could be a problem later in retirement. Now, another source of income could simply be selling the funds which you've bought because they can increase in value, and many of them will. For example, if you buy at 100 and it rises in value to 110, well, you can sell some of that fund and use that as income. So really, what I think people should be focused on instead of just income alone is total

return so that's the income that the investments generate plus the cash capital gain. So while some people focus on income, others on capital gain. I think it's best to have a holistic view of your investments and the sum of both capital gain and income. Today's video is sponsored by Wisdom Tree, one of the leading ETF providers globally. I mentioned that finding a dividend-generating ETF with dividend growth was a good idea. Wisdom Tree has created a range of funds with this goal in mind, called its quality dividend growth family of ETFs. These invest in dividend-paying companies that have a track record of above-average revenue and earnings growth. Dividends are paid out of profits, so by ensuring good earnings and dividend growth, you can increase your chance of generating an income that's able to keep up with inflation. Furthermore, the ETFs have a quality tilt, incorporating companies where management is focused on innovation, efficiency, and long-term value creation. These companies tend to have strong pricing power and invest in research and development and expanding their product and service offerings.

staying ahead of industry trends. They should therefore be able to cope with the ups and downs of the business cycle, providing stability to your investment. This is an example of the global version of this ETF range, which has more than 7 years of track record. Bear in mind, as with all investment products, there are associated risks to consider. To learn more about WisdomTree's quality dividend growth ETFs, you can visit their website by clicking the link in the description below. So, those were all investments that you'd hold in an investment account on an investment platform. Another commonly used source of income would be buy-to-let property. Now, this will not be a diversified investment, usually because it'll be focused in just one country. So, for example, if there's a legal change in your country, it could adversely affect your buy-to-let income. Another drawback is that investments in property tend to use up a lot of capital. They're very capital-intensive, so you could end up with a large proportion of your portfolio in that single market. Another drawback with

B. Toet is that it involves a lot of work. You have tency management, legal and safety responsibilities, financial costs like financing the house with a mortgage perhaps, and also seeking legal advice. And of course, he'll be on the hook for maintenance and repairs on the property. On the positive side, these are leveraged investments where the house is the collateral, and that could boost your returns. But of course, leverage is a double-edged sword. If there's a fall in price, you could end up with a leverage loss and be locked into that property until prices recover. But bolet does generate a steady stream of income if you can get the house rented out, and that's usually roughly inflation-linked, so it behaves a little bit like an inflation-linked bond in your portfolio. Also, there's a psychological factor, which is that people like tangible investments. You can literally see the house, you can touch it, and that provides some comfort for some investors, whereas if you invest in stocks and bonds, it all seems like it's up in the air. It's not

tangible. If you want a safe source of income without being tied to capital gains and losses in investments, then annuities are something to consider. Now, these aren't investments; they won't happen on an investment platform. The idea is that when you retire, you take a lump sum, you buy an annuity with that lump sum, you give that capital to an insurance company, and in return, they agree to pay you a certain income, and usually, that ends when you die. So, that's called a single life policy. Now, if you have a partner, you may want them to receive your income even after your death, in which case you could get a guaranteed period added to your annuity, and that would be paid to your partner for a fixed period of time. Another variation might be a joint life policy, where you're paid an annuity until you die, and then your partner receives 75% of that income after you die, and that would last until their death. Or you could go for 100% life.

annuity where it would actually stay the same, the income even until your partner's death. Now, all the annuities you've seen so far are fixed payments; they don't increase over time, and those are called level annuities. But remember our point about inflation previously. Ideally, you want a source of income that will match inflation, and so what you can get is something called an escalating annuity, where the payments increase by a fixed percentage over time. Hopefully, that'll match inflation, and you won't have to worry about a decreasing standard of living as you get older. Alternatively, you could go for an inflation-linked annuity, which is explicitly linked to a rate of inflation, for example, retail price inflation in the UK. There, the link to inflation is explicit, but of course, you'll end up paying more for that. Or initially, you could end up with a smaller income and have to live a certain period of time to gain from the inflation linkage. If you die early, you might actually be worse off than just going for a level annuity.

say so you can see annuities have huge numbers of variations, and it really pays to shop around to find the one which is right for you and your circumstances. For example, if you want your beneficiaries to inherit some money after you die from your annuity, you can get a value-protected annuity. Or if you don't want to be locked into an annuity for life, you can go for something called a fixed-term annuity. So really do your research and shop around and find the best rates because they vary very widely. So those annuities are usually purchased from an insurance company. Could you create your own annuity? Well, actually yes, you can. It's not as simple, but you can build a safe income stream using your local government bonds. In the UK, we call them guilts. And a sequence of guilts which mature in one year, two years, three years, up to five years say would be called a bond ladder. And there's a link in the description where we talk about that in more detail. But if you do it yourself

potentially, you could save a lot on fees. Plus, you'll understand the source of your income, and you'll have additional flexibility of how you invest. For example, if you want to inflation-link your income, you could buy inflation-linked bonds. You can also hold those bonds inside an ISA or a SIP, so they can also be very tax-efficient. Now, let's move on to tax and tax efficiency in particular, using your tax allowances wisely. Now, in the UK, we've got some very generous schemes. We've got the individual savings account, we've got the self-invested personal pension. But there are subtle differences between an ISA and a SIP, and it's worthwhile understanding those distinctions. So here, for example, you can see we've got our gross income before tax. We pay tax on it, and then we're left with our net income. Now, ISAs and SIPs come out of different parts of that revenue stream. SIPs, for example, come out of our gross income, that's before we pay tax. In contrast, ISAs come out of our net income. We've

already paid tax on that money. So, it wouldn't really be fair if we had to pay tax again. So, if you do make withdrawals in retirement from your ISA, it won't be taxed. Whereas, if we make withdrawals from our pension, it is taxable income. Now, the benefit of a SIP is that usually our income in retirement is lower than it is while we're working, and that means we'll pay less tax on that money. Whereas, with the ISA, you can see that we've already paid tax on that money, so we don't have to pay tax again. Now, until 2015 in the UK, we didn't have much choice. We simply had to buy an annuity when we retired. In 2015, one of my personal heroes, Steve Webb, was one of the architects of pension freedoms, as they called it, where you can go off and invest your own money as you like, and you don't have to buy an annuity. One of the benefits of these pension freedoms is that you can take out 25% of your pension pot on day one of retirement as

a big lump sum now. The media picked up on one throwaway comment from Steve Webb where he said, Yes, you could buy a Lamborghini with that payment, but most people don't do that. Most people are very responsible and invest their money wisely. Often, that lump sum will be used to pay off a mortgage, do up the house, or maybe go on holiday. It won't be used for a Lamborghini, but this is our money, and we should be able to spend it any way we want. However, it does pay to be tax-efficient with your withdrawals, and one of the drawbacks of taking a large lump sum on day one of retirement is that that money will then not be compounding capital gains-free, income tax-free for the next several years. And that's because if you do invest it before you use it, then it probably won't be in a tax-sheltered account like a SIP or an ISA, and it may take many years to drip-feed it into an ISA. So often, it's better instead of taking that 25% lump

sum on day one to space it out over time. So, let's contrast two simplified scenarios. In the first scenario, you take all of your 25% tax-free lump sum on day one, and then the rest of your pension withdrawals are taxable. So, taxable pension withdrawals are shown in blue, and the tax-free lump sum is in yellow. In the second scenario, we didn't take any lump sum initially. What we do is we space out the lump sum for every single withdrawal that we make from our pension. Now, what that does is it reduces our taxable income by 25%. So, in the UK, we have tax bans, and it may be that that reduction in taxable income takes you below a threshold. For example, the threshold between basic rate and higher rate is £50,270 as I make this video. So, by using that 25% tax-free income, you could take yourself below that threshold. This is also assuming that your pensions are your only source of income, which won't be the case once the state pension kicks in, but you can see

the principle. Another useful thing to know is that while you're building up your pensions with a partner, then if you have roughly equal-sized pensions, it can be much more tax-efficient in retirement. So, let's say you want a total income of 60k in retirement. If it's very unequal, if one person has a much bigger pension pot than the other, then let's take a really extreme case where 55k of that 60k comes from just one person. Well, then they can only use their 12.6k tax-free allowance for one income because the other person's income of 5k won't use all of their allowance. There'll be 7,600 of their allowance which is unused. So, it might make sense to top up your partner's pension if possible before you retire so that you can make best use of your allowances in retirement. My final point is about checking your UK State Pension entitlement. Now, it's worthwhile checking whether you're eligible for the full state pension, and you have to have made National Insurance contributions.

for 35 years in order to get the full State Pension. Now, that's definitely worth having because in the UK, as I make this video, we still have the triple lock in place that ensures that pensions increase by the rate of inflation, 2.5%, or wage growth, whichever is the largest. That's pretty generous, and it ensures that you'll keep up with working people's wages and, of course, inflation. And if inflation's particularly low, you'll get that minimum of 2.5%. Now, it is possible to check your state pension very easily using the government's Gateway. Just scroll down here, click on start now. If you haven't got a government Gateway account, it's very easy to set up. And here you can see my forecast. I can get my state pension in 2035, and the forecast currently is that it's going to be £221 a week or about £1,500 a year. Now, I've got 2 years to go of national insurance payments, and then I'll go up to the maximum of £221 and 20 a week. What you can also do

on this page is check your National Insurance record to see whether it's complete, and that way you can see if there are any Missing Years. So, I hope that's giving you some ideas about how to generate income in retirement, how to diversify it across different asset types and geographically, but also not to focus purely on income, but to think about total return and, of course, beating inflation. You don't want to end up with an income that's falling in real terms as you go through retirement. Now, don't forget you can learn more about WisdomTree's quality dividend growth ETFs. To find out more about that, just click on the link in the description below. And as always, thank you for listening.

Future Proofing Your Retirement Income

My name is Ramin Nakisa and I started PensionCraft in 2016 as I felt strongly that I wanted to teach people how to invest well for themselves so they could stop making costly mistakes and losing their money through having to pay unnecessarily high fees.

Before starting PensionCraft, I worked in investment banking as a strategist and I was a frequent contributor on CNBC and Bloomberg TV. I have written two books about finance and investment: one for professional investors and one that explains how to buy and sell volatility using exchange-traded products.

I publish a new video on YouTube every Saturday and you can join me for a live Q&A on the 1st Thursday of every month at 7pm UK time.

If you want to learn how to become a better investor then why not join our friendly membership at pensioncraft.com?


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In retirement, managing income from investments becomes crucial, with stocks, bonds, and real estate being key sources.

Diversifying income streams and investing in funds, like REITs, can provide global diversification and reduce risk.

Matching income with inflation and the increasing cost of living is a significant challenge in retirement planning.

Investing for Income and Capital Growth in the UK

The UK's inflation rate has consistently been above the Bank of England's 2% target, making it crucial for investors to match this rate to maintain their income's buying power.

A holistic investment approach, focusing on both income generation and capital gains, is recommended for long-term financial stability.

WisdomTree offers a range of quality dividend growth ETFs, aiming to invest in companies with strong revenue and earnings growth, providing a potential source of income that keeps up with inflation.

The Challenges and Benefits of Property Investment and Annuities

Property investment involves significant responsibilities, financial costs, and maintenance, but it offers leveraged returns and a steady income stream through rentals.

Tangible investments like real estate provide psychological comfort for some investors.

Annuities offer a safe source of income in retirement, with various options for payment structures and inflation matching, but they may come with higher costs and risks if the investor dies early.

Understanding Annuities and Building Your Own Income Stream

Annuities come in various types, such as value-protected and fixed-term, making it important to shop around for the best option.

It is possible to create your own annuity by building a bond ladder with local government bonds, potentially saving on fees and offering more flexibility.

Tax efficiency is crucial, with ISAs and SIPs having different tax implications, and pension freedoms introduced in 2015 allow for greater flexibility in managing retirement funds.

The Impact of Taking a Lump Sum in Retirement

Taking a large lump sum at retirement can hinder long-term tax-free compounding of capital gains.

Spacing out the tax-free lump sum over time can reduce taxable income and potentially lower it below key tax thresholds.

Having equal-sized pensions with a partner can be more tax-efficient in retirement, and it's important to check eligibility for the full UK State Pension.

The Importance of the State Pension in the UK

The UK State Pension requires 35 years of National Insurance payments for the full amount, which is currently £221 a week.

The pension's triple lock system ensures increases based on inflation, wage growth, or a minimum of 2.

It's easy to check your State Pension forecast and National Insurance record through the government's Gateway.