Pre-Retirement Mistakes During the course of my working life advising people approaching retirement, I come across the same mistakes time and time again. So, I thought it would be useful to highlight some of these so you don t fall into the same trap.
Review existing pensions The chances are you will have accumulated a number of different pension plans throughout your working life. These may be a mixture of company final salary schemes, personal pensions, contracting out of SERPS etc. Provided you have kept these various organisations updated of your current address, you should receive an annual statement showing current value and projected benefits at stated retirement age. At best you may have read these statements but it is unlikely you fully understood them in context of your overall retirement income. Many older style plans have high charges and are invested in dormant or poor performing funds. The effect of this is your plan doesn t grow and instead loses value in real terms year on year. Don t allow this situation to continue, whatever the value of your existing plans you should try to achieve the best possible outcome for them. A good Financial Adviser will conduct a review of your plans and recommend the right course of action, which will either be to leave them where they are or to transfer to a more competitive contract. This could potentially make a big difference to the final value of your pension pot and subsequent retirement income.
Find out your State Pension age and get a State Pension forecast If you are planning for retirement you will need to know your entitlement to State Pension and what age you are likely to receive it. The rules regarding state pension age for men and women have changed recently. Basically, if you are a man born before 6th December 1953, the current State Pension age is 65. For woman born after 5th April 1950 but before 6th December 1953, their State Pension age is between 60 & 65. Under the Pensions Act 2011 women s State Pension age will increase more quickly to 65 between April 2016 and November 2018. From December 2018 the State Pension age for both men and women will start to increase to 66 in October 2020. The current law already provides for State Pension age to increase to 67 between 2034 and 2036, and 68 between 2044 and 2046. However, the government recently announced this will now increase to 67 between 2026 and 2028, although this is awaiting parliamentary approval. In order to calculate your personal retirement age, I suggest you visit http://pensions-service.direct.gov.uk/en/state-pension-age-calculator/home.asp. The next step is to find out what your entitlement is to state pension, which can Be done on-line via https://secure.thepensionservice.gov.uk/statepensionforecast/ or call 0845 3000 168 or download BR19 form from www.direct.gov.uk. You will need the following information to apply for a State Pension statement: Full name, date of birth and current address National Insurance (NI) number Details of any time you have spent working outside the UK
Managing Investment Risk This typically applies to Personal Pensions where you have control over which funds to invest in. Many people remain invested in the same funds chosen when their contract started, despite the fact their circumstances will have changed and attitude to investment risk will no doubt have become more cautious. Not investing in the right funds can have a two-fold effect Firstly, whilst you are accumulating monies, during the period with more than 5 years to retirement, you will want to maximise your return relevant to your capacity for risk, therefore investing in dormant with-profits funds, poor performing managed funds or funds in a lower risk category than you would choose, could be reducing your potential for growth. Conversely, as you near intended retirement age, you will want to protect the accumulated fund from any last minute falls, as these may be difficult to recover in the short time remaining. This option can be built into most personal pension plans and is known as lifestyling, whereby the funds are gradually switched into more cautious funds as you near retirement. If you do not have this facility then you must seek advice to check whether the funds match your risk capacity taking into account your term to retirement
Unrealistic expectations of retirement income Some people assume that as they have been saving for many years their pension provision will be more than adequate for their retirement years. If you are lucky enough to have been a member of a final salary pension for a number of years, then the chances are you will receive a good level of retirement income that will also increase in retirement in line with inflation. If however, your pension provision is mostly personal pension then you will have suffered poor investment returns for a number of years and worsening annuity rates. All of this adds up to a poor pension income. For example, a male aged 65 with a 100,000 pension pot, can expect to receive annuity income of approximately 6,250 per annum, which would remain level in payment for life. Include RPI escalation and the income reduces to 3,750 per annum. If you re married and you want 50% of your pension to continue to your spouse in the event of your death, income reduces further to 3,200 per annum. Not a lot to show for 100,000! The reason for this decline is due to reduction in annuity rates, which are closely linked to falling Gilt yields. Do you know, the same sum would have bought you annuity income of some 15,000 per annum in the early 90 s? Couple this with the fact we are all living longer (every decade average mortality increase by 3 years) and you can start to appreciate the problem.
Know your income and expenditure in retirement Calculating you retirement income is only half the battle, you also need to understand what your outgoings will be in retirement. It can be quite daunting when you compare gross annual salary with future pension income, however, all may not be as bad as first seems. Many of your expenditure items will cease on retirement, work related costs, travel, pension and other forms of savings etc. You should also note that your gross income figure can be quite misleading as a large proportion of it goes in tax and NI, therefore you should compare your take home (net) pay, as this is more relevant to your situation. So, get your bank statements out and list all your current expenditure, then in a separate column delete the items that will not be payable in retirement and amend the items that will change. i.e. fuel costs may reduce, but holiday expenditure may increase. Then compare retirement income versus retirement expenditure.
The best laid plans of Mice and Men often go awry It s understandable that a sense of panic can creep in during your 50 s, there s still a mortgage to repay, grown-up children living at home, education costs and economic uncertainty. One reaction to this is to enjoy life now and worry about retirement when it comes, the other is to plan a strategy to provide for your retirement. At this stage, most people are focused on accumulating wealth, however, you also need to ensure you and your family are covered should you die or suffer a serious illness before retirement. The success of your retirement strategy will depend on your ability to save, if you are unable to work due to accident or sickness for a prolonged period, or you die leaving a spouse and children who are reliant on your income, then this can derail not only your immediate situation but your planned retirement and your family s future too. So before you embark on Save! Save! Save! Ask yourself, what would happen to me and my family if I was unable to work, or even died?
Burying your head in the sand does not help! Many people grow more anxious as retirement looms, believing they don t have enough to retire on and put off the day of reckoning until it s too late. This is a grave mistake as I have never met a client whose situation we could not have improved had they come to us earlier. There are always opportunities to improve your situation, even if it means continuing to work for a few more years, at least you know where you are and don t have that cloud of uncertainty hanging over you. You will also feel a lot less stressed knowing you have confronted the situation and have a plan going forwards. Cotswold Financial Planning Ltd 10a Astley House, Cromwell Park, Banbury Road, Chipping Norton, OX7 5SR Tel: 01608 651608 Fax: 01608 643096 Email: admin@cotswoldfp.co.uk Web: www.cotswoldfinancialplanning.co.uk