In the back
But the fact is that nobody knows
the answers to any of these questions
except in sweeping generalisations
and “rules of thumb”.
And have you really thought about
what you want your retirement
lifestyle to look like?
The world of pensions is also
surrounded by myths, most notably
the “I have a pension, so I needn’t
worry” one.
And herein lies the problem for so
many people who really don’t want to
think about pensions. Not only were
pensions confusing in the past, but
they have become even more complex
with the new rules around freedoms
and the demise of final salary schemes.
The people we often seek advice
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from – our parents, for example – had
a different pension regime and so it
was fair to say that if they had one
at all, they would be alright. This is
because the final salary schemes they
enjoyed paid out a percentage of their
income until they died, regardless.
Many people in the UK think the
pensions they are saving into now
will do the same, but unless you
are extremely lucky, you will have a
defined contribution pension, which
is a very different proposition.
These pensions build up to a value
at retirement and then it’s up to you
– the pensioner – to make that pot of
money last until you die.
We are now in a world where most of us
will have to make less money last longer.
There are no guarantees the money
will last until you die, unless you
purchase an annuity – effectively an
insurance product that assesses your
actuarial longevity and pays you a
sustainable income until death.
However, in this day and age,
annuities will provide you with less
income than a pension pot that
remains invested and allows you to
draw down your money as and when
you need it.
And this is where we get on to this
month’s subject.
If you think your pension behaves
the same way when you’re investing
your money as it does when you’re
spending it in retirement, then you
need to think again.
I want to look at all the issues and
concerns that a retiree may have
that are different from when they are
building up their pension fund.
These two stages are called
“accumulation” and “decumulation”
– essentially saving and spending.
For most people, switching from
saving into a pension to spending
it seems simple, but there are many
things to bear in mind.
Most importantly, at the time you
retire you have one very important
piece of information and that’s
what you actually have in your
pension pot. Of course, this value
will fluctuate with the stock market –
assuming it is all still invested – but
at least you will have a broad idea of
what you have got to work with.
In this day and age,
annuities will provide you
with less income than a
pension pot that remains
invested and allows you to
draw down your money as
and when you need it
Early access
In the run-up to retirement, you will
be faced with temptations: at age 55,
you can withdraw up to 25 per cent
from your pension, tax-free. You may
fancy taking this to fund a world
cruise, a sports car or a new kitchen.
Whether you choose to do this or not
is entirely up to you, but it does seem
daft to rip a quarter of the value of
your pension out 12 years before you
actually retire and deprive yourself
of the potential stock market growth.
It is understandable if you use your
tax-free money to acquire an asset
(or clear down expensive debt), but it
is important not to fritter away your
retirement savings at this stage.
Lifestyle determination
It sounds a little “woolly”, but it is
important that you understand what
kind of retirement lifestyle you want.
Will you be a golfer, a traveller, a
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