At Reeves we have all kinds of clients: people from all walks of life, professions and circumstances. Sadly, some of them come to us when they’ve already made mistakes in their retirement planning. Despite the great variety of these clients, it’s striking how similar these mistakes can be.
Here are the five most common:
Mistake 1: Retiring with an unrealistic plan.
People put off their great ambitions until retirement, piling up things they want to do and places they want to see. While it’s true that the best things in life are free, that’s not necessarily the case when it comes to retirement bucket lists. A world cruise costs money and so does a classic British motorbike. Too often, people don’t understand the value of the assets they’ve accumulated; the best way to use those assets to fund their retirement; and how much they will need to pay for their retirement dreams.
The Solution:
Consult a professional such as Reeves Independent.
We will discuss your circumstances with you in depth and gain an understanding of what it is you want to achieve and sometimes even help to clarify your own thinking. We will also look at your assets, your current pension arrangements and any other relevant circumstances. We will then present you with your options. This can often be a pleasant surprise and maybe you can start ticking off that bucket list earlier than you had imagined or even add to it.
For clients in retirement and who have a drawdown pension, we review the retirement plan every six months to make sure they’re receiving a manageable and appropriate amount of income. We generally have a three-step, long-term plan where the majority of our clients want a higher income for the earlier years of their retirement. When they hit the state pension they can reduce the private pension withdrawals accordingly and, as they grow older and income requirements vary withdrawals can be phased appropriately. Our regular reviews ensure they are hitting their targets and, if not, we can advise on the necessary adjustments.
Mistake 2: Taking tax free cash too early.
Too many people reach the age of 55 and their first thought is that they can take 25% of their pension as a tax free lump sum, so they take all of it, even when they don’t really need it. It may be that they have promised a son or daughter a new car or a deposit on a home. It’s generally a bad idea.
We urge people to remember that this cash forms part of their retirement plan and once they have used the tax-free cash, the only money they can take out their pension without paying tax is the personal allowance of the £12,500, assuming you’re not getting income from anywhere else. If you don’t take your tax-free cash up-front, it could be possible to achieve your target income without paying tax for longer.
Also, once the tax-free cash is in your bank account any further returns it earns will be subject to tax, whereas it could have continued to grow tax free in your pension. Furthermore, once in your bank account, it forms part of your estate and so could be liable to inheritance tax, whereas it’s exempt while it’s in your pension. Also, having additional assets in the bank may affect your ability to claim certain benefits.
The Solution:
Keep your tax free cash within your pension unless you have urgent need of it.
Somebody retiring at 65 who wanted £25,000 a year and has a pension pot of £500k, could create that income tax-free for 10 years or more by using their tax-free cash and flexi access drawdown.
Mistake 3: Not reviewing where your pension is invested.
Too often, people pay money into their pensions and then forget about it, expecting that it’s being managed well on their behalf. But markets change and different asset classes fluctuate in value.
It’s important that your investment portfolio is actively managed to take advantages of opportunities and to guard against threats. The level of investment growth has a huge potential impact on the level of your savings when you come to retire.
The Solution:
Seek a professional to manage your money.
Somebody who is going to monitor the economic conditions and the risks in the market and the opportunities and make decisions to capitalise on that or to protect your money in times of difficulty.
That alone can either make or break your retirement. Fees are paid from the fund, so if the fund is performing well, you’re both benefiting.
Mistake 4: Not taking advantage of tax reliefs.
Pension contributions receive generous tax relief from the government. Somebody who pays £2,880 into his pension will have this boosted to £3,600 with a contribution from the tax man. That represents an immediate return of 25%, a return you won’t be able to earn anywhere else.
Taking advantage of this, is going to put you in a better place when you retire. Also, don’t forget to make maximum use of your personal income tax allowance and ISA allowance.
The Solution:
Take advice every year. At Reeves we provide end of tax year and start of tax year tax planning programmes for our clients.
Mistake 5: Not considering all the available options or not seeking a second opinion.
There are multiple options available when the time comes for you to retire: you can buy an annuity, you can use pension drawdown and if you have an occupational pension scheme then another option is to take the benefits they offer.
Unless you know all the options that are available, you don’t know if there’s any scope for improving your retirement position. Don’t be ignorant of the potential opportunities.
The Solution:
Seek professional advice.
The best option for you will depend on your own individual circumstances and you should discuss these with a professional.
Somebody who has had a well-paid job and accrued a large pension fund, might be able to get a fixed regular income by swapping it for an annuity offered by the provider, however, you are also probably paying more tax than you need to.
There are many options available to you and without professional advice you may make the wrong decision. It might be that the value of their pension could provide a more suitable income in a more tax efficient manner.
These are five common retirement mistakes and it won’t have escaped your notice that the solutions all have an underlying principle –
seek professional advice.
Please Note: These articles are for information only and are based on specific client circumstances which may be different to yours. No advice should be conferred from the articles. No action should be taken without independent professional financial advice as any actions on your pension may be irrevocable and have a big impact on your income in retirement.
