1. Take advice
“As you approach retirement, it is crucial to take advice. The FCA paper shows that non-advised customers almost always stick with their existing pension provider instead of shopping around.
“An adviser will help you find the best value retirement income product to meet your needs. And they will help you understand a safe rate of withdrawal, balancing your income needs against life expectancy and the need to invest for income, which is very different to investing for growth.
“Most advisers will offer an initial consultation at their own cost so you can take your time to decide whether their financial planning service is a good fit for you.”
2. Think twice before disinvesting your pension
“Half of customers are taking their pension savings out but not actually spending it. Instead, they are investing in other products. This could be things like cash, Isas, or buy-to-let. This means they are giving up the advantages that pensions offer such as future tax-free investment growth.
“Cash is unlikely to produce good long-term returns. And illiquid assets like property present their own risks. A financial adviser can help figure out the best way to find an investment portfolio that matches your current financial needs with your longer-term retirement goals.”
3. Ask: do you need to touch your pension?
“Pensions are not included in your estate on death, which means inheritance tax of up to 40% will not apply.
“They used to be subject to a separate ‘pensions death tax’ but this has been removed as part of the pension freedom reforms. Now any unused drawdown funds can be passed on and will be tax-free or taxed at the beneficiaries’ marginal rate of income tax.
“Consider whether it would be more tax efficient to leave your pension invested and use other assets first. The FCA found that 94% of consumers who made a full withdrawal had other sources of retirement income available to them in addition to the state pension.”
4. Ask: can I afford to retire early?
“The FCA report says 72% of pots are accessed before age 65 and consumers rarely consider ‘the future and any of the broader issues around how much they would need to live off’.
“Many people want to retire early, but it is important to ensure that won’t leave an income shortfall later on. A lot of people underestimate how long they will live for.
“Income requirements are thought to follow a ‘u shape’ in retirement with the first phase being the most exciting and therefore the immediate focus. This is where people start to enjoy retirement and the risk is that they get carried away with their spending. Spending then tends to fall as people become a little less active and slow down. But costs may then go up in later life due to health issues and care may be required.
“You should have a plan in place to see you all the way through retirement. Don’t just focus on the now.”
5. Don’t rule out an annuity purchase
“Drawdown has surged in popularity versus annuities. However, before going into drawdown you should consider which option best suits your needs. For instance, if you cannot afford for your pension to run out, you should be considering an annuity. Or you may decide to combine drawdown with an annuity to balance flexibility with security.”
6. Consider your housing wealth
“Many people have a good deal of their wealth tied up in their home. Relying on your home in retirement is difficult and accessing it isn’t always simple. However, it is possible to access that wealth through equity release schemes or downsizing.”