20th April 2015
So we have entered the brave new world of pension flexibility and freedoms.
The question will be whether people will use those freedoms to enhance their retirement choices or just blow their pension pot, living for today and forgetting that retirement might well last twenty, thirty or even forty years or more, asks Andy James, head of retirement planning at Towry…
The Treasury, according to figures announced, is banking on a high level of withdrawals bringing the country in an income tax bonanza over the next few years. Whilst withdrawing pensions as lump sums will be the right choice for some, there is the potential for many early retirees to overspend and leave themselves short of assets and income in later life.
Without guidance and probably advice in most cases, errors will be made and it could be a case of ‘Act in haste and repent at leisure’ – although what sort of leisure will be affordable in later life might be questionable!
Pension Wise, the free guidance service set up by the Government, is up and running, as is the so called ‘second line of defence’ offered by pension providers to point out the pitfalls of accessing pensions. It will be interesting to see over the next few months how many people looking to access their pension plans will utilise the guidance provided by Pension Wise, either off their own back or having been pointed in that direction by their pension provider. It can only be hoped that many will do that or indeed will seek financial advice.
Those offering advice will help their clients understand how long their money will need to last, and therefore what they can afford to spend now against what needs to be put away for the future. How to take income, probably via a blend of guaranteed and flexible sums, will also be a big part of discussions. Retirement is not the end game for pensions, just a new beginning when those plans may well need reviewing to ensure that they adapt for those entering their retirement years. When you stop work, your money cannot, in fact it will probably need to work even harder for you than it did before.
Failure to understand the tax and investment consequences of actions taken, and also the long term effect on their overall ability to properly fund a comfortable retirement, could potentially lead to a train crash. Making the right decisions at the right time to reduce tax charges and ensure that retirement funds outlast retirement years will offer a much smoother and pleasant ride.
So, let’s hope that all those eyeing up a nice nest egg in their pension plan and wondering if that next holiday or new car should be the first purchase do actually look before they leap.