5 ways to waste your pension
28/09/2017
28/09/2017
Since April 2015, people have had total freedom over how they spend their pension pot…
While pensions are still a great way to save for retirement, the options are now potentially limitless. While that means more opportunities, it also means a lot more risks. Getting it wrong at retirement will have an impact on the rest of your life.
As an Independent Financial Adviser (IFA), I thought I’d share my biggest worries for how people could get it wrong at retirement.
The ability to access lumps of cash from your pension can be appealing, that new kitchen or car you have always wanted for example. Remember why you arranged a pension and that by taking lump sums out, you could have a serious impact on future income.
Additionally, you no longer have to buy an Annuity, a product that guaranteed an income for the rest of your life. You therefore need to plan your income, taking too much early or finding that investments haven’t performed as well as you hoped, could cause problems in the future.
You won’t escape tax if you choose to take more than 25% of your savings out in a lump sum. Your money will be categorised as income, and unfortunately subject to income tax.
If you withdraw a large amount, you may have to pay 40% income tax. After saving into a pension in order to receive tax relief, why throw that away at retirement? To get the best tax efficiency, I would recommend that you seek financial advice and plan thoroughly.
Despite the best efforts of the vast majority of IFAs, there will always be people offering advice that may not have your best interests at heart. It is likely that ‘schemes’ will pop up, targeting people reaching retirement and encouraging them to cash in their pension pot and invest.
My best advice is to remember that if something sounds too good to be true, it probably is. Financial planning at retirement is first and foremost about security. You need to make the most of what you have, not risk losing it.
To avoid falling for any scams or too good to be true investment opportunities, I would suggest running anything through with your financial adviser – it’s better to be safe than sorry.
With the promise of a big pension payout, you might be tempted to borrow more now to pay back at retirement. But remember, your pension is there to support you for the rest of your life. It’s a working lifetime of savings. Promising a chunk of it to somebody else will undoubtedly have an impact on your quality of life in retirement. Is whatever you’re borrowing for really worth it?
The choices of what to do with your money are now potentially never-ending. Everyone has different circumstances and needs. That’s why it’s so important that you choose what works best for you personally.
I appreciate you may feel you don’t need to make any decisions until you retire. But now that things aren’t so simple, you’ll need to have a plan in place much earlier.
Now that you know what not to do, you might be wondering how to make more of your pension. I’m afraid that’s a subject for another, much longer article. Of course, if you are curious, the best thing you can do is speak to an IFA.
If you’d like to speak to a member of our team, you can call us on 01823 250750.
By Daniel James DipPFS, Independent Financial Adviser
This article is for information purposes only and should not be taken as financial advice. Calls may be recorded for use in quality management, training and support.