How to avoid seven common retirement mistakes

In addition to the complex nature of retirement decisions, much is at stake in terms of getting things right.

The journey into retirement is often an uncertain one. For some, it can be an ‘expedition’ into the unknown. For starters, there are a lot of variables outside your control such as how your cost of living might change and your state of health. The journey also has an no fixed conclusion. To put it bluntly, no one knows how long they will live. Unlike an explorer setting out to conquer a mountain or find the source of a river, your journey may have a range of outcomes rather than a single end point.

In addition to the complex nature of retirement choices much is at stake in terms of getting things right. Decisions made at retirement, and in the years immediately before and after, can have significant consequences for the rest of your life. Although flexibility can often be built in, the decisions are sometimes ‘one offs’ that can’t be reversed. With this in mind here’s how to avoid some common retirement errors people make during these important years.

1. Not being prepared

Like any journey, you can at least plan for what you might encounter. You can pack the right things to take with you and allow enough budget for any missteps. Setting off into retirement without a plan may not be as potentially fatal as forging into a dense jungle without one but it can be really detrimental to your long-term wellbeing. Maximising the resources at your disposal is crucial, and it can put your mind at rest that you have done all you can.

It is therefore important to review your pension situation regularly. If you find you have a shortfall, you may still be able to take steps to increase the chances your pension pot will be able to achieve the income you want when you retire. A pension calculator can help with your planning.

2. Underestimating life expectancy

Many people underestimate the length of their retirement. On average, people aged 55 today will live to their mid-80s, but there’s a 1 in 10 chance of surviving to mid to late nineties. So, if you are retiring at 65 and you are in good health, you should realistically be planning for up to 35 years.

The Office of National Statistics calculator can give an estimate of average life expectancy. The longer you leave the money invested in your pension and continue to pay into it, the higher your income could be when you choose to take it. It is also important not to take too much of your pension money in early retirement as this could mean you won’t have enough for later.

3. Underestimating the cost of living

Everyone’s circumstances, needs and desires in retirement are different but with lots of extra free time on your hands, it may be that you need more money than you think. Remember too that income is needed for your whole lifetime, and a lot can change. Rises in the cost of living can erode the spending power of cash, and although inflation is currently at a low level, the effects can still be dramatic over time. It is important to strike the right balance between retirement dreams such as leisure pursuits or travelling and the requirements of later life when long term care costs may need to take precedence.

4. Getting your investments wrong

It is vital to ensure your pension investments remain appropriate for your needs. In particular, in the run up to retirement it may be prudent to gradually alter the asset mix in order to meet your objectives during retirement. For instance, if you are planning to buy an annuity (an insurance policy that gives you a guaranteed, regular income for the rest of your life) it may be worth reducing investment risk. However, if you are primarily going to be drawing on your pensions via drawdown then you will need an appropriate strategy that takes sufficient risk to grow your pot but avoids excessively volatility and loss of capital.

5. Not assessing all your retirement options

When you are approaching retirement, you have lots of decisions to make, not least how to convert your pension pot into retirement income. In addition, you need to consider your other assets such as savings and investments as there may be tax benefits to keeping money inside a pension and utilising other means to fund retirement.

Whether you choose to buy an annuity, draw an income from your pension investments via drawdown or a combination of the two, it is worth spending time assessing all the options to make sure you are selecting an appropriate route. If you are uncertain as to which option or options are suitable you should seek professional financial advice.

If you are buying an annuity, it is important to shop around for the best deal. Rates vary between providers, and if you are a smoker or have a medical condition, you could qualify for special rates with some providers.

If you are considering a drawdown pension, you’ll need to be involved in choosing and managing your investments or get financial advice that covers this for you. For a comprehensive retirement plan that will help you plan for your retirement and minimise the risk of outliving your money, it is worth considering regulated financial advice. Our consultants can help you to understand your options and plan your retirement.

6. Paying more tax than necessary

Under current rules once you reach normal retirement age you can normally take a money purchase pension pot such as a SIPP as cash in one go. However, 75% of this sum is taxable under current rules and added to other income in the tax year it is received, so it could push you into a higher income tax band.

You can ‘phase’ your pension in retirement by taking both the 25% tax-free lump sum and taxable income in stages. Spreading withdrawals over multiple tax years in this way can mean you make the most of tax allowances and avoid paying more tax than necessary.

7. Falling victim to a scam

According to the Financial Conduct Authority (FCA), nearly a fifth of over 55s and a third of over 75s believe they have been targeted by an investment scam in the last three years. The ability to take a money purchase pension pot as cash in one go means that people with this type of pension could be particular targets for fraudsters.

To guard against being a victim of investment fraud, the FCA advises consumers to, at the very least:

  • Reject unsolicited contact about investments.
  • Before investing, check the FCA Register to see if the firm or individual you are dealing with is authorised and check the FCA Warning List of firms to avoid.
  • Get impartial advice before investing.

There is more information on how to spot and avoid fraudulent investments on the FCA website.

To discuss any of the themes raised in this article, or to find out how Charles Stanley could help you create a more secure financial future, contact a member of our Plymouth team.

Call us on 01752 545 969, email plymouthbranch@charles-stanley.co.uk or visit www.charles-stanley.co.uk/help-and-contact/people-locations/plymouth

The value of investments, and any income derived from them, can fall as well as rise. Investors may get back less than originally invested. The information in this article is based on our understanding of UK Legislation, Taxation and HMRC guidance, all of which are subject to change. The tax treatment of pensions depends on individual circumstances and is subject to change in future. This article is solely for information purposes and does not constitute advice or a personal recommendation. Charles Stanley & Co. Limited is authorised and regulated by the Financial Conduct Authority.

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