Retirement should be the easy part of life, hence why we save and invest so much to fund it, and there are simple ways to make sure your decisions are the right ones from the start. Increased choice brings increased risks, including the possibility of running out of money later in retirement. To stay on top of your retirement, the author, of the article below, cautions you that there are seven common mistakes you must avoid. Team RetyrSmart
Avoiding these common mistakes can make for an easier retirement
1. Not shopping around
Regardless of whether you are planning to buy an annuity or use income drawdown, you need to shop around to get the best deal. Many simply opt for a product offered by their existing pension provider but this is rarely the best deal.
Not shopping around is a significant problem among DIY investors, according to a report on retirement outcomes by the Financial Conduct Authority (FCA), the financial regulator. It found 94 per cent of income drawdown customers who did not take financial advice accepted the drawdown option offered by their pension provider.
Linked to the first point, if most investors are simply using whichever product is put in front of them, it’s very likely they are not paying attention to how much they’re paying, versus how much they should be paying. An effort to thoroughly research products should mean lower ongoing costs and even small differences in fees can have a big impact over the long term. Meanwhile, shopping around for the best annuity rate would increase a person’s retirement income by an average of 10 per cent.
When considering a product, make sure you look at the total charges. For income drawdown products, for example, this will include the fees associated with your underlying investments, such as fund fees, as well as platform and administration charges for drawing an income.
3. Taking capital out too soon
An annuity gives you a guaranteed income for life so you do not run the risk of running out of money in retirement. But compared with other options such as income drawdown and taking occasional cash lump sums, annuities are very inflexible.
You may increase the risk that your pot runs out before you die. Ned Francis, Financial Planner at James Hambro & Co, says: “People are living longer. Only as far back as 1980 a man retiring at 65 might expect 13 years of retirement. Now it is over 18. A woman had nearer 17 then and has 21 now. So, the most obvious risk in drawdown is taking too much out too soon.”
Other factors that could see your pot run out before you die include a major financial crisis during your retirement, higher inflation eroding the purchasing power of your portfolio, needing to pay for long-term residential care using your pension assets, or living longer than you had expected.
Having a diversified portfolio to mitigate the impact of an equity bear market and a cash-flow plan and understanding sustainable withdrawal rates is vital.
4. Drawing an unsustainable income
So you need to work out what is sustainable for your circumstances instead of unwittingly drawing an income that is not sustainable over the long term.
Nathan Long, senior analyst at Hargreaves Lansdown, says: “A sustainable way to take income is only draw the income that your investments naturally generate. Often people will say that’s not enough to live on but if you are drawing at more than that level you run the risk of devouring your pot too early.”
The starting point is to work out how much you need in retirement every year and then look at how your cash is invested and how much income you can draw from it, how secure that income is and how much you will need to erode your capital by each year. Remember, to factor in a pot of money for later life care, which can be expensive, and always leave yourself a comfortable margin.”
5. Taking too much income during market falls
If you are managing income drawdown yourself, you may be lulled into taking a fixed amount of income regardless of market conditions. This could cost you dear in the event of a bear market.
In the event of a bear market, you can mitigate against the risk of drawing too much income by reducing your investment risk, using cash reserves and/or cutting your spending habits for a while. Mr Francis adds: “We always suggest a client has three to five years’ worth of low volatility/cash based investments to call upon if there is a correction and sustained market fall, to save them having to sell risk assets at inopportune moments.”
6. Having too much in cash
Having some of your pot in cash is useful for protecting against market falls, having too much increases the risk of inflation eroding the purchasing power of your assets. It also means your assets may not be able to generate enough growth to meet future income needs. The FCA’s report found that a third of DIY investors in income drawdown were wholly holding cash.
7. Not paying enough attention to tax
One common mistake the FCA review came across was people moving money from their pension into a current or savings account. In many cases, keeping money in a pension would have resulted in better returns and paying less tax. That’s because, normally, pension contributions benefit from tax relief, and your assets and any growth on them are not subject to tax while held in a pension..