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Ask the experts. Sarah Coles is on hand to answer your personal finance questions. If you’d like a question considered for a future edition send it in now.
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I retire soon and want to make the most of the time I have left earning a regular salary. I’m already well set up financially so what shall I do with any spare cash.
Should I look to invest for income generation so I don’t touch my main retirement pot and just cream off the income for treats etc? Should I be thinking of moving into more cash like investments away from individual company stocks and ETFs? And should I use an ISA or a SIPP?
Simon
It’s human nature to think of different chunks of your savings and investments as completely separate. This kind of mental accounting can be useful, but there are times when it can lead us astray.
Instead of thinking of the money you put aside now separately from the rest of your portfolio, you can consider it as part of the mix. If you have enough cash or cash-like assets to cover the cost of extra spending and treats in early retirement, you don’t need to think of this as a short-term investment.
You might want to use it to boost your income throughout retirement, so you have more left over each month for luxuries. How you invest this will depend enormously on how you plan to take this income. If you were to get an annuity with the whole pension pot, it means crystalising it in the near future, so if you aren’t already derisking your investment portfolio, this is an absolute priority. It means any investment would need to be down the lower-risk end of the spectrum.
If you are planning to use drawdown in your pensions, you will want to do some derisking and diversification, shifting some of the pot into less volatile assets as you approach retirement. It makes sense to consider investing for income, but you’re also likely to want to keep some invested for growth.
You could be retired for three decades or longer, so some of these investments are for the very long term. The money you are setting aside now could fit into this broader picture. If you’re taking a mix and match approach, with some drawdown and some annuities, you will need to find the right balance of income, risk and growth for your needs.
The next question is around the right vehicle for the money. If you want to use it for very short-term cash needs, an ISA may be a sensible approach. SIPPs can take more time and effort when it comes to withdrawing funds. The process is longer and there are more questions about how you withdraw it, whether as a tax-free lump sum or income or a combination of the two. Using ISAs gives you easier access to the money.
However, if you are using this money to boost your income as you go along, or create gains you can spend on luxuries, the tax breaks on a SIPP may be particularly appealing - especially if you’re a higher earner – assuming you don’t earn enough for it to affect your annual allowance. You need to balance this against the fact that ISAs offer flexibility and tax-free withdrawals, so it usually makes sense to hold ISAs alongside your SIPP too.
Sarah Coles: Head of Personal Finance
Sarah Coles is AJ Bell’s Head of Personal Finance. She’s passionate about helping people get to grips with their money, so they have more freedom to do the things that really matter to them in...
