THIS year’s budget came with a big
surprise. As of April 2015, millions
of people reaching retirement age
will have total freedom over how
they spend their pension pot.
While pensions are still a great way
to save for
retirement,
the options are now
potentially
limitless.
While that
means more
opportunities,
it also means a lot more risks. Getting
it wrong at retirement will have an
impact on the rest of your life.
As an independent financial adviser,
I thought I’d share my biggest worries
for how people will get it wrong at
retirement.
1. Spend it too quickly
You may be thinking that with access
to a lifetime of savings you could treat
yourself to a holiday of a lifetime.
But, by doing so your savings won’t be
available in retirement.
Of course, greater control over
your cash ow has its advantages, but we also need to consider the risks.
There will no longer be a requirement
to buy an annuity, which provides a
guaranteed income for the rest of your
life. Annuities are still available, but
purchasing one will be on your own terms, not because of restrictions or
caps.
State pensions are only designed
to pay for basic needs, so without
a guaranteed income it will be a lot
easier to run out of money – whether
through extravagant spending, bad
budgeting or simply living longer than
you thought.
2. Pay too much tax
You won’t escape tax if you choose to
take more than 25% of your savings
out in a lump sum. Your money
will be categorised as income, and
unfortunately subject to income tax.
If you withdraw a large amount,
you may have to pay 40% income tax.
After saving into a pension in order
to receive tax relief, why throw that
away at retirement? To get the best
tax efficiency, I would recommend
that you seek financial advice and plan
thoroughly.
3. Follow bad advice
Despite the best efforts of the vast
majority of IFAs, there will always be
people offering advice that may not
have your best interests at heart. It is likely that “schemes” will pop up,
targeting people reaching retirement
and encouraging them to cash in their
pension pot and invest.
Many financial companies will be
competing for your money. One of
my worries is that in a bid to win your
custom, some may overstate what
they’re offering. Please remember that
this is regulated. So if you feel that
you have been mis-sold a product, do
challenge it.
My best advice is to remember that
if something sounds too good to be
true, it probably is. Financial planning
at retirement is first and foremost
about security. You need to make the
most of what you have, not risk losing it.To avoid falling for any scams
or too-good-to-be-true investment
opportunities, I would suggest running
anything through with your financial
adviser – it’s better to be safe than
sorry.
4. Borrow now and pay back
at retirement
With the promise of a big pension pay
out, you might be tempted to borrow
more now to pay back at retirement.
But remember, your pension is there
to support you for the rest of your life.
It’s a working lifetime of savings.
Promising a chunk of it to
somebody else will undoubtedly have an impact on your quality of
life in retirement. Is whatever you’re
borrowing for really worth it?
5. Leave it to the last minute
Retirement is a big stage in your life.
For many of us, it’s a time that we can
look forward to doing the things we
haven’t had much time to do in our
working years. But all of our big plans
for retirement take a lot of planning
and preparation.
The choices of what to do with
your money are now potentially
never-ending. Everyone has different
circumstances and needs. That’s why
its so important that you choose what
works best for you personally.
I appreciate you may feel you don’t
need to make any decisions until you
retire. But now that things aren’t so
simple, you’ll need to have a plan in
place much earlier.
So, what can you do?
Now that you know what not to do,
you might be wondering how to make
more of your pension. I’m afraid that’s
a subject for another, much longer
article. Of course, if you are curious,
the best thing you can do is speak to an
independent financial adviser.
