Look before you leap
There’s more to retirement than stopping work and cashing in your pension plan.
There are a number of factors that you should carefully consider to avoid making a decision that could have a negative impact on your quality of life in your later years.
How much do you need?
You may have dreamt of retiring, taking the tax-free cash and going on a six-month cruise.
The reality is that retirement doesn’t usually happen on a single day.
Our ‘The Golden Age of Retirement – does rising pensioner wealth mask future problems?’ research show that just under 40% of people aged 50-64 are either partly or fully retired, showing that the route to retirement is often gradual or happens before the state pension age.
The average weekly household income in the 50-64 age group is £513 after tax. However, the average income that households have varies between £530 for those still in work and £472 for those who have fully retired.
People often forget their income will be reduced in retirement, so do you have enough to last for the rest of your life – not only from your pension but other assets and savings plans, too?
You may choose to continue to work part-time for as long as you’re able, but has that featured as an option in your plans?
Is cash really king?
Next, you need to decide what to do with your savings. The freedom and choice reforms allow you to take all of your pension as cash. While there’s nothing wrong with doing that, this option needs careful thought and consideration.
While a portion is tax-free, taking out a large sum in one go will hit your income tax code. You may go from paying no tax to becoming a higher rate taxpayer overnight.
This may also have other financial consequences. For instance, if you’re receiving means-tested state benefits – in other words, they’re based on your income or savings – they could be put at risk.
How much risk can you stand?
If you take the cash, you still have to put it somewhere. Putting it in a savings account will see it eroded daily by inflation. Inflation may be low, but interest rates aren’t expected to outstrip it for the foreseeable future.
These low-interest rate times depress not only bank rates but annuity rates, which look like poor value to many consumers.
Since the freedom and choice reforms came in, many more retirees have opted for income drawdown products which allow them to keep their money invested while drawing an income.
However, there are many others who don’t want all their money tied up in risk-based products. Annuity rates may be low, but the guaranteed income offers security, and increasing numbers of income drawdown products are now being offered with guarantees offering a similar level of security.
If you have a final salary or defined benefit pension which gives you a guaranteed income, you may decide you can be more flexible with your investments.
Not everyone has a final salary pension, so you may choose to mix and match annuities and drawdown to secure a baseline income while the rest remains invested.
How flexible is my income?
Flexibility is important throughout retirement. Our research found that those who are fully retired in the 65-74 age group found their weekly income reduced to £450, but as income reduces, so does expenditure on recreation. (The Golden Age of Retirement – does rising pensioner wealth mask future problems?’, Aegon 2016)
We’re growing older as a population and increasingly need support in our homes or even in long-term care. After inflation, worries about having enough to pay for any care costs in later life is the second largest financial concern for this age group. Almost a third (31.5%) fear they won’t be able to meet their care bill.
Which way now?
You may have decided a course of action already. But is that based on what you want to do at retirement, or what you’ll need to do throughout your retirement?
There may be an alternative solution that offers you similar income, but with lower volatility, greater security and overall, maximum flexibility.
The pension freedoms offer greater flexibility, but also greater responsibility. You need to consider not only the best way to save but also the most suitable way to access those savings.
This may require careful management as your needs change and depending on your circumstances, this may increase the need for advice not only before, but throughout your retirement.