This year pension savers were released from their straightjackets and the pension freedoms introduced in April champion the fact that it’s your money and gives you greater control over what you can do with it.
But with this new found freedom and choice comes a greater level of personal responsibility to ensure you’ve got a retirement planning strategy that caters for your needs up to, into and throughout your retirement.
Before looking at why choosing the right option at retirement is so crucial under the new rules, it’s important to remember that the earlier you start planning for your financial needs in later life the easier it is to design a robust and personalised financial strategy that’ll enable you to reach your goals.
Accident, illness, redundancy or divorce can all rapidly change our personal circumstances. Economic downturns and turbulence in financial markets can also impact on our financial wellbeing. By working with you from an early stage in your career, we can advise you on the effect of such events and discuss the impact they can have using the sophisticated cash flow modelling tools we’ve developed.
Understanding and modelling the impact of life changing events, and significant market movements, enables us to design a retirement planning strategy that evolves to the changing needs of your personal circumstances and lets you save more effectively during your career.
As you near retirement the focus changes from growing your pension pot into working out how you’re going to use it to generate a retirement income. Although the new pension freedoms increase the number of options available, they also come with potentially costly pitfalls.
Once you reach 55 you can now access the money in your pension pot. This could be useful if, for example, you need a lump sum to help your child onto the housing ladder or to pay for their university fees. You might think that taking this money out of your pension won’t be a problem because you’ve paid off your mortgage and can make it up by increasing your contributions over the next ten years.
But depending on how you withdraw the money from your pension, you could affect the amount you’re allowed to then contribute in subsequent years. Take the wrong option and you could find your maximum annual contributions limited to £10,000 instead of £40,000. At a time when you’re looking to back load your pension the effect on the final size of your pot and the retirement income it’ll generate could be significant.
By the same token planning the timing of any withdrawals and ensuring all of your personal allowances are properly used will minimise your tax bill. But if you’re not careful it’s easy to end up paying the taxman more than necessary or to trigger exit penalties from your pension scheme.
It’s also easy to underestimate just how much money you’ll need, especially when life expectancy for today’s 65-year-olds stretches into their mid-eighties. A pension pot of £750,000 might seem like a lot, but not if it’s got to last for 20 years and you get hit by an unwanted or unwelcome surprise. And if you start dipping into your pension savings at the age of 55 then it can be even more difficult to make them last.
The new pension freedoms create new levels of flexibility when it comes to when you can access your money, how you can use it to generate a retirement income and enabling you to look after loved ones when you’re gone. But they also put the onus on you to get it right and it’ll cost you dearly if you get it wrong.
If you’d like any more information on how you can make the new pension freedoms work for you then please contact us or call 01494 450011.