Retirement on the horizon – Time to future-proof your pension?

The COVID-19 pandemic has undeniably had huge economic reverberations, reducing the value of many pension funds and thereby hurting retirement confidence. Now more than ever, it’s a valuable opportunity to review your pension, checking you have the most up-to-date information available in order to save for a comfortable retirement.

The pension freedoms present a number of options, meaning you can make more informed choices to maximise your pension contributions. This raises the question: How indeed are you making the most of your retirement savings?

Pot luck?

Most people used to opt to receive a guaranteed retirement income by buying an annuity. Yet with so much information currently at hand, building up your pension pot might not be as clear-cut as it initially seems.

Tony Clark, Head of Retirement Marketing at St. James’s Place Wealth Management, states:

“We used to have our retirement decisions effectively made for us, especially in defined benefit (DB, or final salary) schemes. Now we have much more flexibility and freedom, but all the responsibility sits with the individual. What they are asking their pensions to do is very different to before.”

As of April 2015, government pension reforms came into effect with the introduction of the pension freedoms, which changed access rules. Previously, pension drawdown had been limited to a wealthy minority, but under the 2015 measures, members of defined contribution (DC) schemes were then allowed to use their entire pension pot however they wished, from the age of 55.

In September this year, the government confirmed that the minimum age for drawing a personal pension in the UK is to rise to 57 as of 2028, as was first discussed back in 2014. While people have plenty of advance warning about this two-year hike, it may be seen as a kick in the teeth at a time when many have suffered emotionally, socially and economically during an already testing year.

Having a clear plan to future-proof your pension – in other words, meeting your retirement goals as well as adapting to any surprises that life throws your way – is therefore all the more crucial.

Decisions, decisions

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.

Sound advice

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.