You’ve probably spent most of your life saving. Decades of pension contributions, investments, and National Insurance contributions all come to fruition when you decide to give up work.
When you retire, you will have potentially hundreds of thousands of pounds in your pension pot. In this era of longevity, that money may have to last you 20, 30 or even 40 years.
And, your options at retirement are complex and often misunderstood. The introduction of Pension Freedoms in 2015 has only magnified this, significantly increasing the range of choices available to you at retirement.
So, as you approach retirement, it makes sense to take advice from a professional to ensure that those savings can help you live the lifestyle you want. Indeed, research by Moneyfacts has found that clients accessing their pension funds through drawdown without advice are three times more likely to run out of money compared to those who sought advice.
The four risks you face in retirement
If you have a Defined Contribution pension (a ‘money purchase’ scheme) you face four main risks when it comes to your retirement.
- ‘Sequence risk’ and running out of money
Research shows that the investment return you receive in the first ten years of retirement largely determines whether you’re likely to run out of money over a typical 30-year period.
If you get good returns in the early part of retirement, you’re unlikely to run out of money. If you get poor or even mediocre returns in the early part of retirement, you may have a problem.
One of the main ways to manage sequence risk is to ensure you stick to a sustainable rate of withdrawals from your fund. A common approach is the ‘4% rule’ – where restricting your withdrawals to 4% of the value of your fund in any year should be enough to sustain the fund for a 30-year period. However, as specialists we feel this is a rule of thumb and many should take less and many should take more.
- Underestimating the effects of inflation
If your retirement is going to last 20, 30 or even 40 years, a major challenge is how to maintain the buying power of your money in real terms.
A yearly income of £1,000 in 1988 had the buying power of £476 by the end of 2018 – a reduction of over 50% over a 30-year period (using the Consumer Price Index).
- Living too long for your money
While many of us may fear death, for retirees the greatest fear should be of living too long! Indeed, studies regularly suggest that ‘running out of money’ is a major concern for many people in retirement.
Retirement income planning is particularly challenging because we’re planning for a finite, but precisely unknown retirement period. Without the proverbial crystal ball, it’s tricky to estimate how long we’re likely to live.
- Paying too much tax
Paying taxes doesn’t stop when you retire. Indeed, Pension Freedoms have thrown up potentially more complex tax scenarios for people looking to access their pension savings. Factors to consider include:
- How to take lump sums tax efficiently without pushing yourself into a higher tax band
- Issues surrounding the Lifetime Allowance
- The Income Tax you pay on your pension income
- Realising investments and potential Capital Gains Tax liabilities
- Issues surrounding potential Inheritance Tax if the value of your estate is more than £325,000.
Here’s a simple example.
If you have built up investments outside your pension, it may be sensible to use these to fund your retirement income in the early years, not your pension.
Why?
If you die before the age of 75, any pension savings can be passed to a beneficiary completely free of Inheritance Tax. If you draw your pensions first and leave your investments, your estate could be liable for a 40% tax bill on these assets.
A retirement specialist has the right tools to help you
So, back to the original question. Do you need a retirement or a pension specialist at retirement?
A pension specialist might be able to look at your various pots and make some assessments and recommendations.
What you really need, though, is someone who understands retirement.
Someone who knows about longevity and sequence risk, and what you can do to mitigate these risks.
Someone who can take a holistic approach to all your finances and structure an income plan that includes not just your pensions, but other assets as well.
Someone who is interested in what you want to do with your retirement and can therefore create a plan that supports your lifestyle aims.
A retirement specialist has the right tools to:
- Plan with a purpose. The purpose is to ensure your financial security, and then enable the retirement you want. For example, a pension specialist might tell you to draw a fixed amount each year. A retirement specialist may help you plan to take variable amounts each year, based on your stated aims and objections. Want to go on a round-the-world trip in year five? Take more income that year.
- Mitigate tax. For example, we use intelligent software that maps different scenarios which could result in considerable tax savings.
- Understand your situation. We have helped dozens of clients to transition into retirement. A general practitioner who provides advice on mortgages, general insurance, and life cover is unlikely to have the same level of experience. Working with clients at retirement means we know the challenges you face and the opportunities you have.
Find out how we can help you to live the life you want in retirement. Contact us today or call 01372 404417.
