Planning for your retirement is one of the most important financial steps you will take. Whatever you intend to do once you’ve finished work, you need to make sure that you have the income and resources in place to achieve your desired standard of living.
This is especially true as we’re living longer. Figures from Aviva show that if you’re a 65-year-old man in England, you can expect to live, on average, to almost 84. If you’re a woman, you can expect, on average, to live to age 86.
This means that your pension might have to provide income for 20 or even 30 years once you retire. So, it makes sense that you seek expert advice to ensure you don’t run out of money once you’ve stopped working.
However, new research has found that more than a third of people were accessing their pension pot without taking financial advice. Keep reading to find out more about this worrying trend, and for three reasons that seeking professional help before raiding your retirement savings can add value.
More than a third of people not taking financial advice on retirement
New analysis from the Association of British Insurers (ABI) has revealed ‘alarmingly low levels of retirement readiness’.
The ABI study found that while more than 62,000 people accessed some of their pension via drawdown between April and September 2018, 34% did so without taking any form of financial advice.
This worrying trend is echoed by the FCA whose Consumer Research Report found that 91% of UK adults did not receive any financial advice in the previous 12 months.
Yvonne Braun, the ABI’s Director of Long-Term Savings Policy, said: “Pension freedoms gave consumers many more options and flexibility in their retirement, but with greater choice comes greater risks.
“To see levels of advice hitting new lows is disturbing and risks leaving thousands of elderly consumers facing poverty later on in their retirement. New problems require new solutions, and empowering consumers to make the right decisions for them is our priority at the ABI.”
The ABI study found that 21,000 people accessed their pension savings without advice. Considering that the average pension fund size has now reached £120,000, thousands of retirees are running the risk of making bad decisions which could have a significant impact on the quality of their retirement.
Speaking to a professional could help you to make better decisions. Here’s why.
Three ways an adviser can add value to your retirement planning
Taking advice before you draw your pension could add huge value.
Rob Yuille, Head of Long-Term Savings Policy at the ABI, says: “It’s great that people are reaching retirement with greater amounts stashed away in their nest eggs, but we have to make sure that they’re armed with the information they need to make smart decisions about how to use it in the run up to, and during their retirement.”
Here are three ways an adviser can add value.
1. Increasing your pension income
There has been a lot of research that shows people who seek financial advice end up with a bigger pension pot in retirement.
For example, a study by Unbiased and AXA Life Invest revealed that nearly half (43%) of UK savers approaching retirement increased their retirement savings levels by £98 a month as a direct result of taking financial advice.
This advice and increase in contributions resulted in an additional income of £3,654 every year of their retirement, based upon a pension pot of £100,000.
Standard Life’s 2017 Value of Advice report comes to a similar conclusion. It says that, overall, those “who work with a financial planner are an average of £40,000 better off than people who have not taken advice”.
What this means is that speaking to a qualified pensions adviser could potentially increase the size of your pension pot, and your income in retirement.
2. Reducing the amount of tax
There are lots of ways in which bad management of your pensions could see you facing an unwanted tax bill.
For example, the amount that you can save into your pension fund has fallen from £1.8 million to £1.055 million. The maximum you can ordinarily save into your pension in a year is limited to your annual earnings or £40,000 whichever is lower. You may be liable for a tax charge if you exceed these amounts. While these may seem like large numbers, savers are increasingly being caught out by these rules.
Similarly, cashing in your pension fund on retirement could also leave you with a big tax bill. You can usually take up to 25% of the amount built up in any pension as a tax-free lump sum. However, if you draw any more than that, you’ll pay Income Tax on the amount. If this is a large sum, you could find yourself in a higher tax bracket, and you could end up paying 40% or even 45% tax on your withdrawal.
Of course, losing a chunk of your pension fund to tax means that you may no longer have sufficient savings to sustain your desired standard of living in retirement.
An expert pensions adviser can help you both build up your pension fund, and help you draw the income you need in retirement in a sustainable and tax-efficient way.
3. Ensuring your investment portfolio remains balanced
Your pension is likely to be invested over a long period of time. And, if you decide to use Flexible Drawdown to access your savings, your funds may remain invested even when you are retired.
This means that it’s important you select the right level of risk at each stage of your life.
In the early days, it may be possible to accept a higher level of risk to potentially increase the returns on your savings. As you approach retirement, you may reduce the risk in order to protect as much of your accumulated fund as possible.
An adviser can regularly review your portfolio to ensure it remains appropriate for your risk profile. Diversification ensures you are shielded from issues affecting one asset class, while constant monitoring ensures you remain on track to achieve the level of income you want in retirement.
Want pensions advice? Get in touch
We’re financial planning experts. Our knowledge of the financial markets is second to none, so you benefit from the best and most appropriate financial products, each tailored to your values and objectives.
To find out more, email admin@stonegatewealth.co.uk or call us on 01785 876222.
Please note
A pension is a long-term investment not normally accessible until age 55. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance. Levels of and reliefs from taxation in addition to the tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.
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