You’ve invested for decades to build a Pension pot that will support your retirement, and the feeling may be that the hard part is out of the way.
Your first step as a client is to consider the best way for accessing your Pension benefits. There are several options available, and it is wise to consider what option is best suited to your unique circumstances. For example, alternative options include using your Pension to buy an annuity, taking a 25% lump sum of your Pension, taking your Pension in one go, or staying invested. Speak to a financial adviser and consider what is best for you. You should also read around the subject, with helpful impartial guidance such as Moneyhelper available.
For many people, Pension drawdown is the route they will take, as this offers the flexibility of staying invested while taking enough money annually to fund your retirement lifestyle.
The challenge that still remains, and the trap that some investors fall into, is making mistakes in Pension drawdown.
If done correctly, Pension drawdown is a way you can benefit from your investments. You have the freedom from 55 onwards to take your retirement income as you see best, with the initial 25% withdrawal being tax free. But there are some mistakes you need to avoid.
Too much, too early
Some people in the excitement of being newly retired will fall into the trap of taking too much and too early.
The big mistake in withdrawing too much early on is that you increase the chance of running out of money later in life.
It is crucial to get your withdrawal rate right, as it may be in later life that expenses pile up. You may live a long time, and you may need to pay for healthcare towards the end of your life – make sure you have sufficient wealth set aside for this. Speaking to a financial adviser can help you plan your future income.
The other mistake in taking too much money at an early stage is that you impede your potential investment growth. The more money you have invested, and the longer you have it invested for, allows for the potential of generating further wealth in the form of growth and compound growth.
It is also a popular misconception that you need to take your full 25% tax free cash when you access your pension, why access it if you don’t need it? Leaving it invested ensures more of your pension pot has the opportunity to grow over time.
It should be noted however that as with all investing, your capital is at risk and you may get back less than you invested.
Decide upon a withdrawal rate for you.
You should also be wary of what’s happening in markets around the time of considering a Pension withdrawal, particularly if it is going to be a significant withdrawal.
While you can’t time the markets, there’s a degree of common sense that your withdrawal may be worth less if markets are significantly lower, such as the steep market decline during the pandemic in March 2020. An adviser could help you decide upon a withdrawal rate to suite your needs and help you navigate potential market volatility and the impact market lows could have on your investment. Your withdrawal rate is something you may want to disucss with your financial adviser as your circumstances will be unique and they could offer advice.
What can be said about your choice of withdrawal rate, is that if you withdraw too much during a market low, you may deplete your Pension pot too quickly and miss out on further growth, potentially meaning you run out of money in later life. You need to find a withdrawal rate that will give you a sustainable Pension for retirement, funding your lifestyle but also staying invested for further potential growth and allowing your Pension to fund your life long into the future.
Speaking with a financial adviser could be beneficial as you may also have other sources of income, such as a state pension, which also is taken into consideration to your withdrawal rate.
Don’t forget inflation
When considering Pension drawdown, it is easy to think in terms of what you may need annually today. In the last year the cost of living has dramatically risen, with inflation rates going beyond 10% towards the end of 2022.
Consider where prices may be ten years from now. And remember, people are living longer, you may have decades of inflation in front of you. What pays you a good lifestyle today probably won’t in the future.
A Financial adviser can help you apply an inflation projection to find out what you may need as an annual retirement income for the future.
Pay attention to tax efficiency and your beneficiaries
Pension drawdown could have a significant impact on the value of your estate and inheritance tax.
Money kept in your Pension is not normally considered part of your estate. By naming beneficiaries in your Pension’s expression of wish you can pass on your Pension to the next generation.
If you have withdrawn your Pension to cash, it could be liable to inheritance tax, which is set at 40% on estates over £325,000. You may be better off keeping your wealth invested in a Pension rather than converting it to cash or assets that could form part of your estate and put you over the £325,000 allowance.
Don’t skip on financial advice
Every person will have a unique set of circumstances to consider when it comes to retirement. That’s why speaking with a financial adviser before you take your Pension is one of the best decisions you could make. They’ll be able to assess your unique circumstances and help you decide on the best course of action. This can help to ensure you are tax efficient, potentially making your wealth last longer or grow in value. An adviser can assist in determining a good withdrawal rate for you, that could help to fund a lasting and fulfilling retirement.
If you need financial advice or would like to open an account yourself click Start Investing or call our dedicated team on 0191 625 0350.
With investing, your capital is at risk. Investments can fluctuate in value and you may get back less than you invest. Pension eligibility and tax rules apply. Tax is subject to an individual’s personal circumstances, and tax rules can change at any time. This blog is not personal recommendation or financial advice.
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