There are many aspects to consider to prepare your pension for retirement, but here are a few tips to get you on your way.
Time is of the essence
Firstly, the sooner this thought process takes place, the better. 10 years leading to retirement is an ideal time to ensure you’re on track to meet your financial goals and ensure everything is in order. Then, if you haven’t saved quite as much as you need to for example, remedial action might not be so painful!
How much do you need?
Identifying ‘your number’ is often the first stage to retirement planning; it sets realistic expectations about how time can be spent and provides clarity about the task at hand. Here, categorising expenses can be useful and to keep things simple consider:
- Basic expenses – utilities, direct debits, food, gym memberships etc
- Luxury expenses – holidays, cars, cash gifts etc
It’s quite common to spend more at the beginning of retirement, certainly on luxury holidays for example, so factoring this into a financial plan can help ensure enough cash is readily available in the short term (i.e up to 5 years).
A few other things to consider are:
- When will the State Pension begin?
- Long-term care costs, which can be eye-wateringly expensive.
- Is an inheritance expected. If so, is this required? If not it may be more tax efficient to gift it straight to children or grandchildren.
- Helping children or grandchildren get on the first rung of the property ladder or pay for a wedding.
It’s preferable to overestimate rather than underestimate and essential to be realistic with what’s affordable.
Taking income from the pension
Throughout retirement it is likely expenditure will vary so having a pension which can accommodate this flexibility is preferable.
Since the ‘pension freedom’ rules were introduced in 2015, taking varying income from a pension has been easier to do, but with those new rules came extra complexity and tax pitfalls which are to be considered.
Unfortunately, not all pensions are compatible with the new rules so it’s important to ensure the existing plan(s) is. For example, older contracts may only offer an annuity or lump sum payment as the sole income options which may not suit everyone.
Are the investments suitable?
The recent market dip may have served as a stark reminder of stock market risks. When saving regularly to grow the pension, market dips are welcome as this allows for investments to be bought at a lower price which boosts long-term growth. It is therefore usually more feasible to crank-up the risk profile with 10+ years to retirement, only to temper the risk when taking an income. However, this is not a fool-proof strategy. There are other considerations such as a market crash when income withdrawals have just started could permanently dent the pension leading the pot to run out too soon. Here are a couple of investment strategies which aim to mitigate such risks.
- Switching to a well-balanced portfolio that could be insulated from the worse market falls but still offers potential for growth in the long term.
- Drawing regular income from cash, using pensions and investments as engines for growth, strategically topping up the cash when market conditions are favourable.
Both have their merits but, as always, it will be individual circumstances which dictate the most suitable path to take.
Regardless of the income withdrawal strategy, it’s imperative to review your risk profile in the run up to retirement. Once agreed, it will be easy to identify if the current investment portfolio is suitable or if fund switches are necessary.
Some pensions only offer access to a handful of funds which can make it difficult to pick a suitable portfolio, therefore moving the pension to a different provider can be an avenue to explore.
Should you consolidate your pensions?
It depends. As you may have gathered, not all pensions are equal. A low-cost workplace pension may have access to 10 funds, for example, with modern contracts offering 1000’s. This doesn’t guarantee better performance but may offer more diversification which can help to mitigate some (but not all) investment risk, at a potentially higher annual cost.
More modern contracts are typically compatible with all the favourable pension freedom rules, making them preferable to many.
Before consolidating pensions, it’s important to check if there are any special guarantees that would be lost on transfer or any exit penalties that would apply; either could make consolidation unfavourable.
- Start planning as soon as possible.
- Identify how much your desired standard of living will cost.
- Find what your pension(s) income options at retirement are. Is it compatible with your lifestyle? Also, calculate what other income will be available throughout retirement i.e. cash, rental income, State Pension.
- How much risk are you taking with the underlying investments? Find out if it’s possible to build a suitable portfolio in your existing plan.
- For those who have amassed several pensions over the years, you may wish to explore if consolidation would be beneficial.
To discuss your pension or retirement planning, contact us.
This article is distributed for information purposes and should not be considered investment advice or an offer of any security for sale. This article contains the opinions of the author but not necessarily Ermin Fosse and does not represent a recommendation of any particular security, strategy or investment product. The information contained herein has been obtained from sources believed to be reliable but is not guaranteed.
Please contact us before you invest/disinvest. The past is not indicative of future results. When you invest you may not get back what you put in. Errors and omissions excepted.
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