Planning for your retirement is one of the most important financial tasks that you’re ever likely to undertake. Whatever your plans are, you’ll need to ensure that you have the wealth to support your desired lifestyle.
Furthermore, as people live longer, your pension will also need to support you for longer. According to Aviva, the average 65-year-old man in England can expect to live to 84. If you’re a 65-year-old woman, your life expectancy is 86.
Your pension may have to provide you with income for 20 or even 30 years once you retire, which is why it’s crucial that you manage your pension effectively. Read on for three reasons why seeking professional advice before drawing your pension can help.
More than a third of Brits don’t take professional advice when retiring
According to a report by the Association of British Insurers, 2020 saw a sizeable increase in the number of people who were accessing their pension fund before retirement. Figures showed a 56% increase from April to September.
One explanation for this behaviour is that many people’s financial wellbeing has been affected by the economic impact of the pandemic and subsequent lockdowns. As many households struggle with a reduced income, it can be tempting to dip into a pension fund to maintain a current lifestyle.
When times are tough, many people want to feel more financially secure and in control. This can sometimes lead to people making decisions which feel good at the time but are not in their best interests in the long term.
For example, the report notes that the number of people who withdrew their pension in one lump sum increased by a staggering 94%.
During periods of economic disruption, it’s easy to make rash decisions without fully considering the consequences for your long-term financial wellbeing. That’s why it’s important to speak to a financial adviser before acting, as they can provide you with level-headed guidance about your best options.
Seeking professional advice can help you to manage your retirement wealth more effectively
According to research published in FT Adviser, only two-fifths of Brits have sought financial advice at some point in their lives.
This is a concerning figure, as making major financial decisions without advice can put your wealth and long-term financial wellbeing at risk. This is particularly true for people who are close to retirement.
Here are three ways that working with an adviser can help you manage your retirement wealth more effectively. They can help to:
1. Increase your pension income
One of the most obvious benefits of working with a financial adviser is that research shows people who seek financial advice typically have a larger pension in retirement.
According to a study by the International Longevity Centre (ILC), clients who worked with an adviser were typically better off by £47,000 over a period of a decade, on average. This amount includes an increase of £31,000 in additional pension wealth, which can be invaluable for ensuring you have enough to sustain you throughout your retirement.
As you can expect to live between 20 and 30 years in retirement, it’s important that your pension is large enough to sustain your preferred lifestyle. If it isn’t, you may have to accept a lower quality of life than you had expected.
2. Reduce the amount of tax you pay
If you don’t seek advice, making a mistake when managing your pension could see you landed with a hefty tax bill.
For example, each year your Annual Allowance dictates how much you can contribute into your pension and benefit from tax relief. For the 2020/21 and 2021/22 tax years this is the total of your annual earnings or £40,000, whichever is lower.
This limit applies to all of your pension schemes and will fall to only £4,000 if you start flexibly accessing your pension.
If you exceed this limit when making contributions, you won’t receive any tax relief on the amount above the threshold and may be faced with additional charges. You also have a Lifetime Allowance for the amount you can contribute to your pension without triggering extra charges. This limit was recently frozen at £1,073,100 until 2026.
Similarly, cashing in your pension fund as a lump sum can also land you with a considerable tax bill.
You can typically take up to 25% of your pension tax-free, but if you draw more than that you’ll have to pay Income Tax on the amount. If you’re a higher- or additional-rate taxpayer, this could mean 40% or 45% of your pension is taken in tax.
Losing a sizeable chunk of your pension fund to tax can mean that you don’t have enough money to fund your desired lifestyle in retirement. A financial adviser can help you to draw the income you need in retirement in a tax-efficient way.
3. Balance your portfolio
One of the most important things when managing your pension is ensuring that you select the right level of risk for your stage in life.
When you’re young, you may accept a higher level of risk to potentially increase the returns on your pension savings. As you approach retirement, you may want to reduce your risk to protect as much of your wealth as possible.
Working with an adviser can be invaluable for making sure that your portfolio is appropriate for your tolerance to risk. Furthermore, they can help you to diversify your assets to protect them from short-term disruption, while monitoring your portfolio’s growth to ensure that you’re on track to reach your financial goals.
Get in touch
If you want to be able to make informed decisions when building your pension wealth, get in touch. Please email info@investmentsense.co.uk or call 0115 933 8433.
Please note
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.
