Adrian Walker
AUTHOR Adrian Walker| CREATED 03 Jun 2015

Retirement pitfalls: why the new rules create risks as well as opportunities

As the number of retirement options increases, so does the risk of making a bad choice. The good news is that, by following some simple rules, you should be able to avoid any disasters – and make a confident choice about which retirement strategy will work for you.

Freedom is a great thing in principle, but it does come with responsibilities. The new pension rules will give you almost complete control over how you use your accumulated savings, but they’ll also require you to make decisions that – for most people – were never a consideration.

The fact that you no longer need to buy an annuity, for example, means that you have an array of choices about how to use your pension pot. But it also means that you’ll have to think carefully about how to make the pot last for the whole of your retirement – and have enough self-discipline to stick to your plan!

So what are the potential pitfalls you must avoid, in order to make the most of your retirement savings?

Don’t rush into irreversible decisions

Some retirement decisions are irreversible – using some of your pension pot to buy a lifetime annuity, for example. So it’s important to feel completely clear about your options, and comfortable that you’re making the best possible decision for your individual needs, before you take any important steps.

As a child, you may have been told to ‘Stop! Look! Listen! Think!’ before crossing the road. And this motto is a good one to keep in mind as the new pension rules come into force.

  • Stop before you make any decision – do not act impulsively, or because you’ve been told to do so by a friend from the golf club who is an armchair investment adviser.
  • Look at high-quality sources of information about what’s now possible and how you can begin to choose which options might be right for you. This website will help you make a start, but you may also wish to consult the government’s Pension Wise website, for example.
  • Listen to someone who knows what they are talking about. Ideally, this will be a financial adviser regulated by the FCA (you can search for one here). But at the very least you should talk to one of the experts being made available to over-55s as part of the Pension Wise scheme – you can get guidance on the options available (though not advice on which route to take), by talking to one of their team over the phone, online or face to face at a participating Citizens Advice Bureau.
  • Think long and hard before you make a decision. Unless you’ve got an immediate need to start generating an income from your pension pot then time is on your side. Indeed, you may be better off waiting until new products and services become available, as there are only a limited number available now that can take advantage of the new pension rules (though obviously this will depend on your individual circumstances).

Above all, you should not feel pressured into taking action for the sake of it.

Don’t risk running out of money

If you choose not to buy an annuity when you retire then you need to be absolutely clear about the risks involved. You will have no guaranteed income stream, and any money you leave in your pension pot will remain invested. You will still have the option of buying an annuity at a later date, but until then the value of your pension pot could rise or fall. And if you have no other source of income then you’ll need to make withdrawals to fund your everyday expenses.

Don’t forget that your retirement could last 30 years or more. And if your pension pot can’t cover your expenses over that period then you’ll be dependent on the state. Changes to the State Pension in 2016 could make you better off – you can read about those in our article entitled Why 2016 changes could affect your plans today – but if you don’t have another source of income then you may find your quality of life drops considerably.

Don’t use the wrong products and/or strategies

You do not need to take advantage of the new rules if you don’t want to, and indeed for many people the best option may be to take the traditional option of taking a tax-free lump sum upon retirement – the so-called Pension Commencement Lump Sum – and then using the rest of their pot to buy a lifetime annuity, to guarantee themselves a minimum income for the rest of their lives.

What’s right for you will depend on your individual circumstances and your retirement priorities – and on how much money you have been able to save for your retirement. A flexi-access drawdown product, for example, will generally only be suitable for someone who has a large enough pension pot to cover their essential outgoings for life with plenty to spare. A lifetime annuity, by contrast, could be the appropriate choice for someone who feels that only a secure income for life will give them peace of mind.

However, even buying an annuity has its risks, and if you’re considering one then you should watch out for the pitfalls. For drawdown products, an additional set of pitfalls applies.

If you’ve got a financial adviser then they can help make sure you avoid any potential mistakes. They can also give you a set of recommendations based on a detailed analysis of your circumstances, needs and goals. This is especially useful if you’re considering a flexi-access drawdown product, as these can be complex to set up and manage, and may require a complex investment and tax-planning strategy to produce the best results.

If you don’t yet have a financial adviser but are interested in finding one then you can find out more here.

Don’t treat your tax affairs lightly, and end up paying through the nose

One of the most exciting aspects of the new pension rules is that they could enable you to reduce the tax payable on your pension wealth – especially if you’re intending to pass some of that wealth on to loved ones. However, they also raise the possibility of massive, unexpected tax bills for those who act without thinking.

If, for example, you decide to withdraw all of your pension in one go – something that wasn’t possible under the previous rules – you’ll only get 25% of it tax free, with any extra taxed as income. If it’s a large amount, the tax band applied could be higher than you’ve ever paid before. If you don’t have any other sources of income then the money you withdraw will still have to be used to fund your retirement, but you’ll have lost a huge chunk of it from the word go.

Aside from this type of mistake, there are all sorts of ways to get tax planning wrong if you don’t know what you’re doing. So this is really an area in which it’s best to get professional help from a financial adviser.

Don’t become a victim of fraud

There is some evidence that fraudsters are increasing their attempts to deprive people of their pension savings, by taking advantage of confusion surrounding the new rules. Some people of retirement age have, for example, been contacted out of the blue by individuals or companies claiming to offer a ‘free pension review’. These fraudsters typically then encourage the victim to move their pension savings to a different product on the promise of better returns.

Needless to say, you should be wary of any contact you receive that you haven’t asked for, and should take advice only from advisers who are regulated by the FCA. For more information about how to spot and deal with such activity, you may wish visit the FCA’s website, here.

Adrian Walker

Retirement Planning Manager Old Mutual Wealth

Adrian has worked within the Skandia and Old Mutual Wealth organisations for over 25 years. He has had several roles covering the technical aspects of pension savings and identifying opportunities for customers and their advisers. That includes financial planning for people already with pension savings and those considering using a pension scheme to build savings for later life. Adrian is well known in the financial industry for his expertise and is a regular press spokesperson for Old Mutual Wealth, working with both the press to highlight issues arising from the continuing changes to the pension landscape, particularly with regard to longer term retirement income needs of consumers.