IN THE BACK
GETTING THE
RUG PULLED
It is all well and good setting a target date for your retirement, but many people
ultimately find that the decision is taken for them, writes John Blowers
W
hile I have been
researching these articles,
I have got talking to some
friends and acquaintances who are
in their 50s and 60s about their own
circumstances.
What is astonishing is that
many of them didn’t really choose
to retire at a particular point in
their lives – rather something in
life happened to them: for example
redundancy, an inheritance or
windfall, or a change in lifestyle.
Some of my friends are still in
denial that they have retired at all.
They aren’t working, they seem
to have enough money to get by
or even thrive, but are hoping or
expecting to return to work in the
future.
It does seem now that people
drift into semi or permanent
retirement rather than hit a target
date to hang up their boots.
The point I am trying to make
is that most of us cannot really
plan for retirement on a specific
date because circumstances may
change. Therefore, when you
reach the age of 55, you need to
be very careful about taking that
extremely tempting tax-free 25 per
cent of your pension fund.
Now there are plenty of
circumstances under which you
shouldn’t be too concerned about
taking this lump sum out of your
retirement fund, particularly if you
22
have a large pension or you are not
relying on the income you plan to
generate between taking this sum
and the date you plan to retire.
A MAJOR ISSUE
But imagine this. You hit 55, but
need to work until 65 to achieve
your target pension pot. This
last 10 years of employment can
make a massive difference to your
pension – it tends to be the period
where retirement is a very real and
imminent concern and there is still
time to significantly contribute to
your fund.
However, what if you take out
25 per cent of your fund for that
dream kitchen/holiday/car/boat/
villa, then lose your job or ongoing
income that forms a key part of
your retirement strategy?
The first effect is that you have
25 per cent less money working
in the market, so less money
compounding over time.
Secondly, there is the risk that
your income stream could stop
before your planned retirement
date, which can escalate into a
major issue if you cannot source
additional income. In effect, you
are forced to retire before
your pot is as full as you
had planned for, which
will reduce your
retirement
income.
Worse still, you’ll have to draw
down your investments potentially
years before you had planned,
meaning you will have to accept a
significantly lower income.
CRITICAL FINAL YEARS
So, if you think you run the risk
of losing your income during the
critical final years of employment,
think hard about touching that taxfree lump sum.
In a previous article, we discussed
sequence risk – the effect of a stock
market fall early on in retirement.
Taking large cash-free lump
sums from retirement effectively
simulates sequence risk, as it
reduces the amount of money you
have working in the market.
Clearly, if you are taking cash out
of your pension fund to acquire
an appreciating asset then this is a
different situation. Property, home
improvements, classic cars and so
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