Ready to set sail for pension freedom? Then watch out for those rocks. There are more ways than ever to get the kind of retirement you dream of – but for a whole generation these are uncharted waters. Here are seven reasons why you may need an expert navigator.
Farewell, ferry; hello, sailboat. That’s basically what happened to pensions this year. Up until April 2015, pensions worked a bit like ferries: always taking you to the same place, predictable, pretty safe and also pretty dull. But not everyone wants a one-way trip to the same sort of retirement, so pension freedom was introduced. Now retirement is like getting your own sailing boat: you can sail it wherever you want – to the same destination as the ferry if you like, or anywhere else. The point is, it’s up to you now. The downside is, if your pension freedom boat does hit a rock, the government has made sure that they won’t be to blame. You’re sailing that ship alone.
It looks like a calm and sunny day out there – so where are the rocks to avoid?
Rock 1: Tax
People have been told ‘You can withdraw your whole pension pot in one go.’ They hear that part perfectly. But many develop selective deafness at the next part: ‘But only 25 per cent is tax free, and you’ll have to pay income tax on the rest.’ Incredibly, pension providers have been bombarded with requests to withdraw the whole sum in one go, despite the huge tax hit that would result, equivalent to many years of savings gone in flash. Pension Wise (the free guidance service) has been alerting people to this danger, but because they’re not allowed to give advice, they can’t actually say ‘Don’t do it’. Best not to run aground on this one.
Rock 2: Running out of money
Even a modest pension pot can look like a colossal sum of money if you’ve never seen that much in one account before. Don’t make the same misjudgement as the builders of the Titanic – that money has to last you the rest of your life, which at the age of 65 could easily be 20 or even 30 years, or more. So it really isn’t about the size – it’s what you do with it that counts.
Rock 3: Stock market volatility
If you invest your pension pot in a drawdown fund, you’ll certainly have a lot more freedom – but your money will remain invested on the potentially stormy seas of the stock market. As various financial crises have taught us, it’s rough out there. Do you have lifebelts handy (such as back-up savings) if your pension fund hits a difficult year?
Rock 4: Poor investment choices
Choosing the right investment fund for your pension pot is a delicate balancing act. It’s not simply a case of choosing the one that promises the biggest returns, because inevitably there will be a higher risk involved. Nor is it a case of just playing safe, because then the growth may not meet your needs. Finding the right choice for you requires a careful assessment of your financial circumstances as a whole, as well as your overall tolerance of risk.
Rock 5: Charges for drawdown funds
One of the nastier lurking rocks, this one. Historically, drawdown funds were the preserve of wealthier pensioners, so the charges for the funds tended to be quite steep. Some providers still charge high fees – acceptable if your fund is £250,000 but poor value if it’s only £50,000. Some fees may not be obvious, either, but hidden in complex charging structures or in the fine print, so you may not spot them at all unless you consult an adviser who knows what to look for.
Some providers are offering DIY drawdown scheme setups for those who don’t want to pay for independent financial advice. Ironically, these may end up costing more in hidden charges than it would have cost to hire an adviser – and those who do hire advisers are often offered better deals anyway.
Rock 6: Frauds and scams
With millions of pensioners now having potentially easy access to tens or even hundreds of thousands of pounds, criminals, rogue traders and other sharks are already in a feeding frenzy. Despite all the warnings, it’s still easy to fall for promises of unbeatable investments, or cold calls from fake advisers. Always remember: real advisers and government-backed services do not call you first. If anyone does so, be instantly suspicious.
Rock 7: Choosing a poor-value annuity
The main alternative to drawdown is buying an annuity (a guaranteed regular income for life) – but there are countless different annuity products out there, some of which may represent much better value for you. One of the biggest dangers of pension freedom is actually to be afraid of it, and to shy away from the options and take the apparently ‘safe’ path. It’s very easy just to stick with your current pension providers and accept the annuity they offer you, but this may well not be best for you. Always shop around, with the help of an adviser who can search the whole of the market.
So remember – there are plenty of hazards out there, but they shouldn’t prevent you from enjoying your pension freedom. All you need is an expert adviser to help you sail safely to a prosperous retirement. Because despite all the tricky stuff, pension freedom still rocks.