"Anyone who has never made a mistake has never tried anything new." Albert Einstein’s words ring true, and sometimes mistakes are part of the learning process. What really matters is how you recover from them. At Reeves, we work with clients from all walks of life, and unfortunately, some come to us after making mistakes in their retirement planning.
However, these errors can often be corrected and set on the right track. In this article, we'll explore some common retirement planning mistakes and provide solutions to help you move forward.
Retiring with an unrealistic plan
Many people delay their big ambitions until retirement, creating a bucket list of experiences and places to explore. While the saying goes, “the best things in life are free,” this doesn’t always apply to retirement dreams - a world cruise or a classic British motorbike comes at a cost. Too often, people don’t fully grasp the value of the assets they’ve accumulated, how to effectively use those assets to fund their retirement, or how much they will actually need to achieve their retirement goals.
The solution is to contact a financial adviser, such as Reeves Independent, who can help you plan effectively for your retirement. You can find out more in our handy article as to why financial planning for your retirement is so crucial to achieving your retirement goals.
At Reeves Independent, we’ll have an in-depth discussion with you to understand your circumstances and clarify your goals, sometimes even helping you refine your own thinking. We’ll review your assets, current pension arrangements, and other relevant factors, then present you with your options. This can often be a pleasant surprise - maybe you can start checking off that bucket list sooner than you thought, or even add to it.
For clients already in retirement with a drawdown pension, we review their retirement plan every six months to ensure they’re receiving a suitable and manageable income. We generally follow a three-step, long-term approach where most clients prefer a higher income in the early years of retirement. Once they reach state pension age, they can reduce private pension withdrawals, and as their income needs change with age, withdrawals can be adjusted accordingly. Our regular reviews ensure that clients stay on track, and if they’re not, we offer advice to make the necessary adjustments.
Taking tax free cash too early
Many people reach the age of 55 and immediately think they can withdraw 25% of their pension as a tax-free lump sum, often opting to take the full amount even when it’s not necessary. This could be driven by promises made to a son or daughter for a new car or a deposit on a home, but it’s generally a poor decision.
We encourage individuals to remember that this cash is a crucial part of their retirement plan. Once they withdraw the tax-free cash, the only funds they can access from their pension without incurring tax are the personal allowance of £12,500, assuming they aren’t receiving income from other sources. By not taking the tax-free cash up front, it may be possible to achieve your target income without paying tax for a longer period.
Additionally, any returns earned on the cash once it’s in your bank account will be subject to tax, whereas those returns could have continued to grow tax-free within your pension.. Finally, having extra assets in your bank account could impact your eligibility for certain benefits.
The answer to this would be to keep your tax-free cash within your pension unless you have an urgent need for it.
For example, someone retiring at 65 who desires an annual income of £25,000 with a pension pot of £500,000 could generate that income tax-free for over 10 years by utilising their tax-free cash and opting for flexible access drawdown.
Not reviewing where your pension is invested
Too often, individuals contribute to their pensions and then neglect them, assuming they are being managed effectively. However, markets fluctuate, and the value of different asset classes can change significantly.
It’s crucial to actively manage your investment portfolio to capitalise on opportunities and protect against potential risks. The growth of your investments can greatly influence the amount of savings you have when you retire.
The most effective way to achieve this is to enlist a professional to manage your investments.
This expert will monitor economic conditions, assess market risks, and identify opportunities, making informed decisions to capitalise on favourable situations or safeguard your funds during challenging times.
Their expertise can significantly impact your retirement outcome. Additionally, since fees are paid from the fund, if the fund performs well, both you and your manager benefit.
Reeves Independent has a specialist in-house investment team who are always on the ball. We are experts at finding the ideal investment solution. To learn more about our investment services you download our guide here.
Not taking advantage of tax reliefs
Pension contributions benefit from substantial tax relief provided by the government. For instance, if someone contributes £2,880 to their pension, the government will add £720, increasing the total to £3,600. This equates to an immediate return of 25%, which is a return you won’t find elsewhere.
By taking advantage of this relief, you can significantly improve your financial situation for retirement. Additionally, remember to fully utilise your personal income tax allowance and ISA allowance to maximise your savings.
The key is to seek advice annually.
At Reeves, we offer tax planning programs at the end and beginning of each tax year for our clients.
Not considering all the available options or not seeking a second opinion
When it's time to retire, you have several options: you can purchase an annuity, utilise pension drawdown, or, if you have an occupational pension scheme, take advantage of the benefits it offers.
Without knowing all the available options, you may miss opportunities to enhance your retirement situation. Don’t overlook the potential benefits that could improve your financial future.
At this juncture we probably sound like a broken record. But please do pursue professional advice.
The ideal option for you will depend on your unique circumstances, so it's important to discuss these with a professional.
For instance, someone with a high-paying job who has built up a substantial pension fund may consider exchanging it for a fixed regular income through an annuity from their provider. However, this could lead to paying more tax than necessary.
There are numerous options available, and without professional guidance, you risk making an unfavourable decision. It’s possible that the value of your pension could be used to generate a more suitable and tax-efficient income.
Those were some of the most common mistakes in retirement planning. You may have noticed that the solutions share a common principle - attain professional advice.
Reeves can assist you in evaluating your options, developing an investment and retirement plan aligned with your goals, and help you to achieve your retirement objectives. Book a free review today to begin your journey toward a brighter and more sustainable future.
