Making the right
decisions at retirement will make all the difference to your financial security and
affect how you pass your wealth down the generations. Tim Walker divisional director of Financial Planning at Brewin
Dolphin in Exeter discusses the most common mistakes people make at this
critical time and how to avoid them.
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| Tim Walker - Divisional Director at Brewin Dolphin Exeter
The five retirement mistakes to
avoid
Making the right
decisions at retirement will make all the difference to your financial security and
affect how you pass your wealth down the generations. Tim Walker divisional director of Financial Planning at Brewin
Dolphin in Exeter discusses the most common mistakes people make at this
critical time and how to avoid them.
1. Retiring too
early
It is likely your
pension will be near to its highest value when you reach retirement. However,
the timing of your retirement could have a significant impact on the level of
income you receive. Generally, though subject to investment content and market
fluctuations, the longer you can leave your pension fund invested, the larger
the fund will become. This is due to compound interest which Albert Einstein
described as “the eighth wonder of the world”.
2. Making the wrong
choice with your pension
When you retire, most
pensions do not automatically start to pay you an income. You have to make a
choice: either to buy an annuity, which will pay you a guaranteed income for
your lifetime, or take income drawdown, where your pension pot remains invested
and you draw an income based on how your investments perform. Annuities suit
those who need a guaranteed income and are a lower risk option than income
drawdown, where your income may fall as well as rise.
For many people, a
combination of guaranteed income through annuities and State or other pensions,
combined with some income drawdown can provide the best of both worlds.
3. Not shopping
around for the best annuity
If an annuity is the
right choice for you, shopping around for your annuity can improve your income
significantly. The shopping around process is known as using the ‘open market
option’. If you are a smoker or suffer from poor health then you may be
entitled to an even higher income, via an ‘enhanced annuity’ – it is always
worth disclosing health conditions and lifestyle information when getting an
annuity quote.
4. Not taking your
full tax-free cash entitlement
After age 55 you may have
the option to draw a pension commencement lump sum which is usually 25% of the
fund value. If needed this could be used to clear your remaining mortgage, take
a cruise or provide a supplementary income to your pension. Otherwise, leaving
this money within your pension pot can offer valuable tax benefits, so take
advice before you act.
5. Paying more tax
than you need to
Perhaps the biggest
tax mistake I see is people not using their Individual Savings Account (ISA)
allowance. Retirement is the time when you will convert your portfolio from
pursuing a growth objective to delivering an income and this process is easier
and cheaper if your investments are sheltered in ISAs. ISAs are free from
capital gains tax and further income tax and can provide you with a great
source of tax free income.
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