Retirement may be the time that many people long for, but it can also be a risky undertaking, with various potential threats blocking your path to a stress-free post-work life. So just what are the risks you need to be aware of, and how can you avoid them? We take a look at a few things you need to bear in mind.
According to research from WEALTH at work and the Pensions Management Institute, 88% of pension scheme trustees fear that many of those approaching retirement would face predatory attention from scammers, leaving them open to losing their life savings.
It's a legitimate concern: pension scams are on the rise, largely since the introduction of the pension freedoms, which gave retirees more control over how they spend their cash – and scammers are looking to help liberate it for them.
To protect your pension savings and ensure you don't become a victim of one of these unscrupulous individuals, it's important to know how to spot a pension scam so you're better able to avoid them. Here are a few tips to remember:
No matter what's being offered, if you haven't previously been in contact with the company and asked them to get in touch, it's probably a scam – if you've been called by phone it's illegal anyway (a pensions cold calling ban has been in place since January), but if you suspect anything, check who you're dealing with on the Financial Services Register and report any unsolicited contact.
Another risk to be aware of is the potential tax implications of accessing your pension pot, yet according to the WEALTH at work study, 81% of trustees believe that members are not equipped to deal with these issues. So what kind of thing do you need to be aware of?
At the most basic of levels, any pension income you receive above your personal allowance will be taxed according to your income tax rate, so 20% for basic rate taxpayers and so on (though you can initially access 25% of your pot tax-free). How this will impact you will depend a lot on how you choose to take your pension – if you intend to withdraw the full amount as a lump sum and have a significant pot, you could tip over into a higher tax bracket, but even opting for income drawdown and taking too much in the first few years could mean a higher tax bill. Remember to include the state pension in your income calculation, too, because both are a taxable form of retirement income. If you're concerned, make sure to discuss everything with an independent financial adviser to work out what's best for you.
One of the most pressing risks is arguably running out of money in retirement, and if you make poor decisions at the outset, it could drastically impact your future standard of living. It's unsurprising, then, that 60% of pension trustees are concerned that their members' money won't last throughout retirement, so it's important to think carefully about your future income needs – and how you can meet them – from the beginning.
This will involve thinking carefully about how much income you need to (ideally) maintain your current standard of living – taking into account income from the state pension and any other company pensions you have as well – and how long you'll need your pot to last for. Many people underestimate this aspect, but the typical retirement can be longer than you think, and you may need to stretch out your pot for 30 years or more. While purchasing an annuity can be a sure-fire way of guaranteeing an income for life, other methods (such as income drawdown) don't have that same guarantee, in which case you'll need to carefully plan how much you take from your pot each year to make sure you don't spend it all too soon. Again, advice can make all the difference.
No matter what method you choose for accessing a retirement income, chances are you'll need to pay charges of some kind, such as to your annuity or income drawdown provider – and even if you cash in your pot and invest it yourself, there could still be annual charges to pay to the investment firm. There's investment performance to consider as well, not only if you invest yourself but also if you opt for income drawdown, which is why many people in retirement opt for low-risk funds to reduce the threat of a downturn that could impact their overall pot.
Given the wide array of risks involved when it comes to planning your retirement (and there are surely more that we haven't covered here), getting advice really is key, as Jonathan Watts-Lay, director at WEALTH at work, comments:
"Individuals nearing retirement face some unique challenges. The retirement income options available can confuse and bewilder even the savviest person and leave them open to an array of risks. These findings indicate that individuals coming up to retirement are likely to be ill-prepared and blissfully unaware of the potential problems ahead when accessing their pension. Unless more support is provided, it's likely that many individuals will make poor decisions at-retirement.
"Our report suggests that all these concerns and risks could be mitigated if more individuals received support, including financial education, guidance and access to regulated advice, as well as help to implement their chosen retirement income option(s). I urge those approaching retirement to speak to their employers and pensions scheme providers to find out what support is available, before making any irreversible decisions that they may come to regret."
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