Since the introduction of the pension freedoms in April 2015, those approaching retirement face more choice, and therefore more important decisions that need to be taken, than ever before. They can choose to keep their pension pot invested and draw cash from it, take a cash lump sum out of it, purchase an annuity, leave it all to their family, or even withdraw and spend the whole lot.
Each option comes with its own benefits and drawbacks, and there’s no such thing as a one-size-fits-all solution at retirement. And of course there are also other important considerations like taxation, investment strategy, and need for cash-flow planning to work out how much to take from a pension to ensure it lasts comfortably throughout retirement.
Freedom brings responsibility
Whilst being in control of their pensions has given retirees more options as to how and when they access their funds, making the right choices about their money can be a daunting and risky task for those unaccustomed to dealing with pension and investment issues.
Worryingly, a recent poll by Aegon revealed that only 8 per cent of people speak to a financial adviser about these important decisions. 47 per cent make retirement planning choices on their own, and 41 per cent involve their spouse or partner in the process.
However, research from the International Longevity Centre and Royal London shows that those who receive financial advice are likely to be at least £40,000 better off than those who don’t, and in many cases the figure can be a lot higher.
Does de-risking in the run-up to retirement still make sense?
People approaching retirement have traditionally considered switching their pension savings out of risky investments into safer options. However, this was normally done in preparation for buying an annuity. However, under the pension reforms there is no longer a requirement to purchase an annuity at any age, so this advice has in most instances been superseded.
De-risking usually involves a pension fund automatically moving funds from stock market investments into corporate or government bonds and cash. These can represent a poor and more risky choice for pension savers, and the best advice can often be to remain invested in stock market investments that offer the opportunity for higher growth. This is just one of many retirement issues where professional advice can help people make the right decisions for their financial circumstances.
The rise of pension drawdown
The Financial Conduct Authority recently reported that twice as many pension pots are moving into what’s referred to as income drawdown than now go into annuities, the older more traditional retirement solution that was often criticised for representing poor value for money.
Income drawdown is a way of using your pension pot to provide a regular retirement income by reinvesting it in funds specifically designed and managed for this purpose. The income you will receive will reflect the funds’ performance, underlining the need for informed investment advice from the outset.
Drawdown provides flexibility, but can be complex in operation, so professional guidance that takes full account of your financial circumstances will help ensure you make the right decisions about the level of income you choose to receive in retirement.
Holistic advice tailored to your lifestyle
As with many of life’s important wealth decisions, getting professional advice that takes a holistic view of your finances and considers your goals and objectives, and what you want your money to achieve for you and your family, makes good sense.
If you could use some truly independent advice about planning for retirement and making the most of the pension freedoms, then do get in touch.