The government is yet to set out how these changes will be implemented and how it will communicate these updates with savers. However it plays out, people who enter retirement over the next decade or so will be held up as a model for future generations to closely follow.
Retirement is undoubtedly a huge life event with many difficult points to consider, from assessing that you have enough income to lead the lifestyle you want, as well as clearing any debts before you retire, to deciding what you want to leave behind for your family when you die.
Dr Greg Davies, Head of Behavioural Science at Oxford Risk, says:
“The number of decisions that people have to make – and the pressure of those decisions – has increased tenfold.”
The fact that we can get our retirement income from a range of sources, such as a State Pension, a workplace DB and/or DC pension, a personal pension, ISAs and other investments, earnings and property, further complicates the decision-making process. What should you use first? Should you start by accessing ISAs or pensions, given their different tax treatment? What Inheritance Tax considerations do you need to factor in? What should you leave until later in retirement?
Tony Clark points out that all these sources need to be balanced out with income and capital too, particularly as fewer people reach retirement with DB pensions. He says:
“The State Pension is purely income, whereas pensions in retirement are now a case of managing the income you draw down as well as managing the capital. It’s a lot of plates to keep spinning.”
Being exposed to new risks is also part and parcel of staying invested in retirement. These can include longevity and inflation risks, sequencing risk (the damaging impact of negative returns at the beginning of drawing down retirement income) and pound-cost ravaging (the effect of taking income from a retirement pot when markets are volatile). Read more about avoiding or mitigating these risks here.
Another consideration is our own behaviour and emotions in the retirement journey. Behavioural factors are often not included in decision-making, Dr Greg Davies notes:
“The financial personality of the investor ultimately matters as much, if not more, than the calculations. Security of income for the rest of your life is a remarkable benefit. But it is not always considered in decision-making, because getting regular income is a continuation of what you had when you were working. Once you remove that income framework, how do you know how people can stick to their spending plans?”
When making retirement decisions, people also tend to use ‘rules of thumb’ based on what are seen as social norms. “For instance, it’s common on reaching retirement to use some of your savings for a holiday, which means you’re already taking a lump sum out upfront without calculating the impact,” Davies adds.
We are all prone to biases, and the major decisions made around retirement income are often led by our emotions and likely to be influenced by our behaviour. A financial adviser removes these factors, helping you to navigate the minefield of options and give you that all-important peace of mind that your priorities are in order.
“This is where advice really comes into its own, because you need counsel to help manage the responsibility,” Clark says. “Advice will help with knowing when to make changes and when to reset your course. It’s not a one-and-done scenario now; it’s about making decisions throughout the course of retirement.”
Need help future-proofing your pension? At Wellesley, our experienced advisers can help you find a retirement income plan that works for you. Call us today on 01444 244551.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds you select and the value can therefore go down as well as up. You may get back less than you invested.