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The seven types of retirement investor

So I was naturally delighted to hear the idea that there are only seven basic retirement plots.

"Drawdown is more a state of being than a product," says Richard Parkin, head of retirement at Fidelity Worldwide Investment. "People get to retirement and fall off with their planning. Many don't change their asset allocation when they move into drawdown. But there's always scope to have a bit of an idea as to what you're doing. There are seven types of drawdown investor, all doing different things."


1. Empty my pot

Subplot 'without paying too much tax on the cash'. Pension freedoms that came into effect in April mean anyone aged 55 or over can withdraw their pension as they wish. However, you have to pay income tax on withdrawals over the 25 per cent tax-free lump sum. Most investors will probably have to spread their withdrawals over four or five years to lessen the tax blow. But while you're waiting to empty the pot do you leave it in cash or buy some sort of fixed-income fund or even equities for the portion to be withdrawn after five years? There's the dilemma.


2. Leave it behind

This plot is a common scenario for customers with significant other retirement income. It was seen in last week's IC Portfolio Clinic in which Simon aged 68 wanted to leave his self-invested personal pension (Sipp) assets as a legacy for his children. Pensions can be a tax-efficient vehicle to pass assets on to your heirs.

We've also seen readers who want to leave their pension untouched in case they need it to pay for an expensive stay in a care home. Here we are talking about a pure growth strategy - and if you're investing for your children, a very long time scale enabling a higher risk level for the portfolio.


3. Make it last

This plotline is concerned with how to deal with living too long. It's usually used if you have an aversion to annuities or are in ill health. The idea is to take your pension savings and use up the capital, ideally spending your last penny on the day you die. However, that's a near impossible feat so it's probably better to think in terms of 'How do I make sure I don't leave lots behind?'.

You'll have to consider the types of withdrawal strategies.

Is 4 per cent income too cautious? It might be a good starting point. However, you could probably set your income level higher, say 5 per cent, in the early years, assuming average market performance and a higher appetite for risk.

It's important to be prepared to increase or decrease your income levels over time depending on whether markets do well or poorly. Mr Parkin says: "With 4 per cent you're quite likely to have a lot of money left at the end. Start with the average outcome and be prepared to adjust. If things go well (and they most likely will) income can be increased over time."


4. Growth and income

The focus is on drawing a (growing) income while preserving or growing your capital. It might be used if you need an income but also want to leave pension assets as legacy or for long-term care. It is a common strategy followed by investors with significant other retirement income.


5. Bridging income

Also called a 'mezzanine income' strategy, this is a two-phase drawdown strategy for investors who need to draw on pensions in early retirement, with higher payments taken for the first phase. Once the state pension comes in at age 65+ or you receive other benefits, such as defined benefit pensions, you then take a lower income level. Investors who don't need to take any income in the second phase might move the pension back to a growth strategy - see plot 2.


6. Temporary income

The focus is on drawing a (growing) income and then securing income through annuity purchase or otherwise after age 75, or even 85. So you are basically aiming to stop investing in older age. The aim is to do better overall than you would have if you had bought an annuity at the start of retirement. "You're not managing so much uncertainty," says Mr Parkin. "You need to make your money last 20 years and then that's it. The crude way to do it is to take 15 per cent of your portfolio and put it in a target fund to buy an annuity at age 85."


7. Intermittent withdrawal

In this plotline, pension savings are regarded as a financial back up in case of unpredicted spending needs. 'Help my adult child with a deposit for a property at some point' would be one example. This plot is often followed by investors with significant other retirement income.

The thread that links all seven retirement income plots is the need to create real, sustainable income over a fixed period.