Retirement is a stage in life that many of us eagerly anticipate as it brings newfound freedom, personal exploration and relaxation. However, protecting one’s retirement income is something that should be a very high priority for any person approaching the end of their career.
The introduction of the Pension Freedoms Act in 2015 transformed the landscape of retirement planning, offering retirees more choices and control over their financial future. But along with this newfound freedom comes a set of financial intricacies that require careful consideration regarding retirement income.
In this article, we explore 6 mistakes retirees should not make and how to avoid them.
More about the Pension Freedoms Act
In the past, retirees often felt railroaded into purchasing annuities, which provided them with a fixed income for life. The annuity was a one-size-fits-all solution that didn’t always align with individual retirement goals and needs. Fortunately, the Pension Freedoms Act has revolutionised the retirement landscape and individuals have the flexibility to access their pension savings from the age of 55 (rising to 57 in 2028) in any way that suits their financial plans.
The embrace of pension freedoms has been remarkable, with savers readily taking advantage of this newfound flexibility. Recent data from HMRC reveals that during the first half of this year, 1.1 million individuals withdrew £7.5 billion from their pensions, marking a 17% increase compared to the same period in 2022 and a substantial 67% rise since 2020. The statistics clearly demonstrate how pension freedoms have empowered retirees to make more personalised financial choices.
However, while the liberation of retirement income flexibility is undoubtedly a positive shift, self-managing retirement income can be more complex than it initially appears. Retirees must navigate several potential pitfalls and challenges to ensure they are making the most of their retirement income…
1) Early retirement income withdrawals: A risky proposition
Pension freedoms may allow early access to retirement income, but this doesn’t necessarily make it a wise choice. When retirement could span two, three, or even four decades, withdrawing funds prematurely can lead to a significant reduction in savings when they are most needed. Additionally, early withdrawals may result in a hefty tax bill.
Although 25% of the pension can be withdrawn tax-free when purchasing an annuity or transitioning to a drawdown, other withdrawals can incur income tax, potentially pushing retirees into higher tax brackets. Furthermore early withdrawals can trigger the money purchase annual allowance (MPAA), significantly limiting future retirement income contributions.
2) Management strategies for retirement income
Retirement planning is not only about access to funds but also how to manage those funds efficiently. Tax considerations and inheritance planning should play a crucial role in your asset management strategy.
Assets held in a pension are exempt from inheritance tax, making it a valuable part of your estate. At the same time, retirement income from pensions is taxable, whereas withdrawals from ISAs are tax-free.
To optimise tax benefits and ensure financial stability, it’s essential to develop a strategy that leverages both retirement income sources effectively.
3) Life expectancy and retirement income
The steady increase in life expectancy is a testament to advancements in healthcare and improved living conditions. While living longer is a blessing, it also poses financial challenges.
The average life expectancy for retirees is on the rise, making it crucial to prepare for an extended retirement period. Without proper planning, the risk of outliving your savings becomes a stark reality.
4) Inflation and its impact on retirement income
Inflation, often referred to as the “silent thief,” has a significant impact on the purchasing power of your retirement income. Recent years have seen a spike in inflation rates, affecting the cost of living. Older individuals, who often spend a more significant portion of their retirement income on essential expenses, are particularly vulnerable to the erosive effects of inflation.
Protecting your retirement income against inflation is essential. While the state pension may receive some degree of inflation-proofing, annuities, with fixed payments, offer limited protection against rising living costs. It is vital to incorporate strategies that account for the impact of inflation.
5) Safeguarding your retirement income
Strategic withdrawals from your pension can help you maintain your financial stability during retirement. It’s critical to stay informed about market conditions and adjust your withdrawal strategy accordingly. Pound-cost ravaging is a phenomenon that occurs when you make withdrawals during market downturns, causing your portfolio to suffer greater losses.
To prevent this, retirees can maintain a cash reserve that can be tapped into during market downturns. Adjusting withdrawals during market fluctuations can reduce the pressure on your retirement portfolio and increase the chances of recovering losses when markets rebound.
6) Protecting your retirement income from scams
Pension fraud poses a significant threat to retirees. Scammers employ increasingly sophisticated tactics to deceive individuals and gain access to their retirement income funds.
To be safe, beware of unsolicited approaches and high-pressure sales tactics as scammers often promise free pension reviews, early access to pension funds, or high returns. Recognising and resisting these tactics is essential, and most legitimate financial businesses do not typically contact individuals out of the blue. Taking your time to make decisions and using resources provided by the Financial Conduct Authority (FCA) can help safeguard your retirement income.
What to do next?
Retirement planning in the age of pension freedoms is a journey that requires a comprehensive understanding of the various aspects involved. You can ensure a financially secure retirement by navigating the potential pitfalls, strategically managing assets, preparing for extended retirement, considering the impact of inflation, and implementing prudent withdrawal strategies
Brite offers an unparalleled all-in-one pension service. This allows us to give you a cohesive service, from advisory to pension administration. You can contact Brite today to receive quality expert advice regarding your retirement.
If you have previously transferred your pension to an existing pension scheme but have been disappointed by your investment’s overall service or performance, Brite can help you make the next step. If you have any questions about protecting your retirement savings or would like to know more, contact Brite here.