The glittering prize of retirement often seems too far ahead to warrant consideration. But if you are to make the most of your hard-earned savings and pension, you need to start planning a long time before you crack open the bubbly.
“There are decisions often to be made up to 10 years before you retire,” says Jonathan Watts-Lay, director at WEALTH at work, a leading provider of financial education, guidance and advice in the workplace. “It’s important to understand your options so you do not squander your hard earned retirement savings through poor decisions.”
Key to the process is understanding the pensions glidepath: the investment decisions that need to be taken over time, before retirement. This process used to be automatic and aimed at an annuity outcome; pension schemes would gradually move investments from riskier equities into safer bonds and cash as the retirement date approached, so retirees were protected from market shocks before buying an annuity.
Now, the vast majority of retirees will be using some level of drawdown rather than buying an annuity. It may therefore be preferable to stay invested (at least partially) in equities; after all, retirement has a much longer time horizon than previously and the old adage that pensioners did not have the time frame to invest in stocks and shares no longer holds good.
Today’s pensions have an unprecedented level of flexibility that can work to an individual’s advantage; but that flexibility can mean an unprecedented level of confusion. Watts-Lay comments, “Many employees need a helping hand to work through their income options at-retirement. By providing financial education and advice in the workplace, it can help individuals to avoid mistakes such as paying too much tax, buying inappropriate products, and ensure pension scams are avoided! As well as providing individuals with the support needed, it can give a level of comfort to employers and Pension Trustees.”
“What individuals need to understand is their total wealth – that a pension pot is potentially one of several assets and income streams at-retirement,” says Watts-Lay.
For example, many people may have built up a variety of pensions with different companies; they could also have savings in ISAs, not to mention wealth tied up in their home. It may be possible to blend the income streams from different sources to reduce or even avoid income tax altogether. It may be worth transferring a final salary pension into a defined contribution scheme to increase flexibility but that could be the worst decision you’ll ever make; it all depends on your personal circumstances.
Our total wealth is no longer neatly divided into income and savings, earnings and annuity; instead, we are more likely to take a mix-and-match approach. That means the decisions never stop coming, and financial guidance and advice is needed not only in the years leading towards retirement but most certainly at-retirement and beyond.
Making these decisions often requires a long hard look at some of the less pleasant facts of life, which is why many of us prefer not to think about it; it is not easy to face up to an income shortfall or the need to keep working for longer than we thought. But problems don’t get any better for being ignored, and consulting an adviser could help you discover matters aren’t as bad as you thought.
By looking at your options early on, you can begin to make the necessary decisions, and give yourself time to glide into a comfortable retirement.