Your rugby career is likely to come to an end when you are in your 30s.
Even if you have saved into a pension, you cannot access those savings until age 55 (rising to 57 in 2028, unless you have a protected pension age). This means there will be a period of potentially 25 years or more during which you will need to provide yourself with an income.
You may already be making plans for your “second career”, whether that is in rugby or a totally different field.
However, you can gain some valuable financial freedom and peace of mind if, during your playing career, you build an investment portfolio that generates an income when you hang up your boots.
Here are five key steps to help you work out how much investment income you may need and how to provide it.
1. Establish how much income you need to generate from your portfolio
Your starting point is to understand exactly how much your investment portfolio needs to contribute to your overall income each year.
Begin by calculating your essential living costs, then factor in discretionary spending, future goals, and any one-off expenses you expect over the coming years.
Then, on the other side of the ledger, set out all other sources of income, such as employment, coaching, media work, or business interests.
The difference is the amount your portfolio will need to generate.
Having a clear understanding of the income your investment portfolio will need to provide allows you to develop a strategy around your actual needs, rather than making withdrawals on an ad hoc basis and placing unnecessary pressure on your capital.
2. Build an investment strategy around your income needs
Once you know how much income your portfolio needs to produce, the next step is deciding how to invest your wealth.
While it may be tempting to focus solely on investments that generate a high level of income, this approach can increase risk and may not provide the long-term growth needed to keep pace with inflation.
Instead, a well-diversified portfolio should typically combine investments that produce natural income, such as dividends and bond interest, with assets that offer the potential for capital growth over time.
The aim is to create a sustainable source of income while preserving as much of your capital as possible.
Your investment strategy should also reflect other factors, such as:
- Your attitude to risk
- Your expected time horizon
- The flexibility you have from other sources of income.
You then need to review your strategy regularly, so you can adapt your portfolio as markets change and your financial circumstances evolve.
3. Develop an effective and sustainable income withdrawal strategy
Generating an income from your investments is about far more than deciding how much to withdraw each year. You need to find a balance between restricting your lifestyle with too little income and drawing so much that you deplete your fund too quickly.
Because of this, your withdrawal strategy should take account of several different factors, such as:
- The term over which your fund will need to provide you with income
- The expected investment returns
- The effect inflation can have on your income requirements.
Your income strategy will also need to be flexible. For example, during years when investment markets perform poorly, reducing the income you take can help preserve your portfolio and improve its long-term resilience.
Equally, stronger market returns may provide opportunities to replenish your cash reserves and set aside money for one-off spending.
4. Maintain investment growth, even after you start taking income from your fund
Once you have started drawing income, you must maintain an effective investment strategy that is specific to your unique goals and situation, rather than simply opting for defensive investments such as bonds and fixed-interest holdings.
As you have read, you may need to wait 25 years until you can access your pension fund. Over that period, inflation alone can dramatically reduce the purchasing power of your wealth.
Because of this, your investment strategy should look to maintain long-term growth that beats inflation, while still providing income.
The right balance depends on your objectives, risk tolerance, and overall financial situation.
5. Ensure you are making the most of available tax allowances
Making full use of the tax allowances available to you can improve the efficiency of your portfolio and potentially reduce the amount you need to withdraw each year.
Individual Savings Accounts (ISAs) are particularly valuable, as any income and capital growth generated within them is free from UK Income Tax and Capital Gains Tax (CGT).
You can contribute £20,000 each year to a Stocks and Shares ISA to help you build a highly tax-efficient investment portfolio. If you have a spouse or partner, they can also make the same annual contribution.
Depending on your circumstances, it may also be possible to make use of your CGT Annual Exempt Amount, Dividend Allowance, and Personal Allowance when structuring income withdrawals.
Again, if you have a spouse or civil partner, using both your allowances can further improve your tax efficiency.
The value of professional financial advice
As you can appreciate from reading this, creating an investment portfolio that can support your lifestyle for many years is about much more than choosing the right funds.
It requires careful planning around your income needs, investment strategy, withdrawal rate, tax position, and changing personal circumstances.
These decisions become even more important if you are looking to your portfolio to help bridge the income gap between retirement from the game and accessing your pension benefits.
If you would like to talk to us about your own arrangements, please get in touch.
Email enquiries@dbl-am.com or call 01625 529499 to speak to us today.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate tax planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
The value of your investments (and any income from them) can go down as well as up, and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstance