Beware Of Retirement Planning Pitfalls
8th January 2019 Paul Andrews
Retirement planning is a complex area so here are three key areas that need to be taken into account to avoid three common pitfalls in retirement planning.
Pitfall 1: Going awry with risk
It’s often assumed the ‘mistake’ with risk is to take too much of it. But too little risk can also be problematic. This means that some people’s retirement planning may benefit from a risk rethink.
When it comes to the 3 Golden rules of pension planning, it is recommended calculating how much you think you’ll need in retirement and how much you think you’ll have. If you end up with less than you need, your options include saving more or retiring later.
But there’s another option too – taking a different approach to risk. For example, the risk profiles we use at 7IM are Cautious, Moderately Cautious, Balanced, Moderately Adventurous and Adventurous – and a chat with an adviser about your pension goals could see you moving along this spectrum.
Let’s be clear here, we’re certainly not saying that taking more risk is a solution for closing a retirement planning gap. But it’s an option, and a chat with us could help you assess your choices.
Pitfall 2: DIY can be a false economy
How’s this for a stat? In a survey of people retiring in the UK in 2012–2014, those who sought financial advice ended up with more financial assets (£13,435) and higher pension wealth (£27,664) than those in similar circumstances who didn’t seek advice*.
DIY finance has its attractions, but skipping professional advice can be a false economy – as that survey for the International Longevity Centre showed. An unnoticed mistake, or slightly lower returns year after year, may have far-reaching implications.
To get financial advice, you could pay a one-off fee or a percentage fee based on your assets. It’s also worth contacting the free PensionWise service, especially if your pension pot is relatively small.
Pitfall 3: Taking a lump sum without a plan
Before pension freedoms, the age of 55 was just an unremarkable midway point between 50 and 60.
But with the opportunity to take 25% of your pension pot as a tax-free lump sum, reaching 55 unlocks a range of possibilities, including paying off a mortgage, helping family, or even a mid-life gap year.
Another option – often seen as more ‘cautious’ – is to take the tax-free lump sum and save it for a rainy day. But this is not as ‘safe’ as it seems. That’s because if your lump sum earns interest of, say, 0.25% and inflation stands at 2%, its value in real terms will steadily go down.
What you do with a tax-free lump sum will depend on your lifestyle and goals, but ‘saving’ it without a plan could see you lose money year after year.
In terms of retirement planning, many of us have more choice and wealth than ever before. That’s a great thing, but with choice and flexibility come more pitfalls. To help prepare for the financial future you want, it’s worth talking to a professional.
About the Author - This piece was provided by the team at Seven Investment Management. To find out more about the work they do and planning ofr retirement, visit their website here
* Source: International Longevity Centre, 2017