Eight retirement planning traps and how to avoid them

There have never been more options in terms of retirement planning but there have never been greater challenges. Rob Morgan highlights eight ‘traps’ to avoid.

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  1. Rob Morgan
  1. Not reviewing your pensions

It is important to review your pension situation regularly. If you find you have a shortfall, you may still be able to take steps to increase the chances that your pension pot will be able to achieve the income you want when you retire. The Money Advice Service has a useful pension calculator, which can assist in your planning.

It is also vital to ensure your pension investments remain appropriate for your needs. In particular, in the run up to retirement it may be prudent to gradually alter the asset mix in order to meet your objectives during retirement. For instance, if you are planning to buy an annuity (a defined and guaranteed regular income) it may be worth reducing investment risk.


  1. Underestimating life expectancy

Many people underestimate the length of their retirement. On average, people aged 55 today will live to their mid-to-late 80s, but around 1 in 10 men and 1 in 5 women this age will live to 100.  So if you are retiring at 65 and you are in good health, you should realistically be planning for up to 35 years.

The Office of National Statistics calculator can give an estimate of average life expectancy. The longer you leave the money invested in your pension and continue to pay into it, the higher your income could be when you choose to take it. It is also important not to take too much of your pension money in early retirement as this could mean you won’t have enough for later.


  1. Underestimating the cost of living

Everyone’s circumstances, needs and desires in retirement are different but, with lots of extra free time on your hands, it may be that you need more money than you think. Remember too that income is needed for your whole lifetime, and a lot can change. Rises in the cost of living can erode the spending power of cash, and although inflation is currently at a low level, the effects can still be dramatic over time. It is important to strike the right balance between retirement dreams such as leisure pursuits or travelling and the requirements of later life, when long term care costs may need to take precedence.


  1. Overestimating investment returns

In the past few decades an environment of decent economic growth and falling interest rates has provided a fair wind for most investments. Despite some notable hiccups such as the dotcom bubble, the global financial crisis in 2008 and more recently with the coronavirus crisis, bonds, equities and property have all delivered decent returns.

Yet going forward the economic outlook could be entirely different. Interest rates are exceptionally low, and there seems little prospect they will rise in the short to medium term. This means the returns on cash in banks and building society accounts are likely to remain low. Meanwhile, yields on fixed interest investments such as bonds have fallen, meaning you need a larger capital sum to generate a particular level of income.

A low inflation, low interest rate, low growth environment could also mean that investment returns from a properly diversified portfolio are set to be leaner than they have been historically. These trends may mean it is necessary to either start saving for retirement earlier in life, make additional contributions or settle for a later retirement date.


  1. Believing your home is your pension

Some people take comfort in the fact that they have built up equity in their home and therefore have the option of downsizing should they need to. However, as well as any tax consequences, you need to consider how much income this can realistically generate.

For instance, if your house is worth around £500,000 and you downsize to a £250,000 property, you could release £250,000 to help fund retirement. It may sound like a lot of money, but with equity income or corporate bond funds typically yielding in the region of 3-4% per annum, a portfolio built from these could realistically produce about £10,000 a year to help fund retirement without eating into capital – though yields are variable and your capital is at risk.


  1. Not assessing all your retirement options

When you are approaching retirement you have lots of decisions to make, not least how to convert your pension pot into retirement income. Whether you choose to buy an annuity, draw an income from your pension investments via drawdown or a combination of the two, it is worth spending time assessing all the options to make sure you are selecting an appropriate route. If you are uncertain as to which option or options are suitable you should seek professional financial advice.

If you are buying an annuity - an insurance policy that gives you a guaranteed income for the rest of your life - it is important to shop around for the best deal. Rates vary between providers, and if you are a smoker or have a medical condition, you could qualify for special rates with some providers.

If you are considering a drawdown pension you’ll need to be involved in choosing and managing your investments, or get financial advice that covers this for you. To better understand the choices for using your pension pot, a useful start is Pension Wise – the free and impartial service backed by the government.

For a comprehensive retirement plan that will help you plan for your retirement and minimise the risk of outliving your money, it is worth considering regulated financial advice. We would be delighted to introduce you to one of our Financial Planning consultants, who can assist you in your retirement plan and other financial arrangements.


  1. Paying more tax than necessary

Under current rules, once you reach normal retirement age you can normally take a money purchase pension pot as cash in one go. However, 75% of this sum is taxable under current rules and added to other income in the tax year it is received, so it could push you into a higher income tax band.

You can ‘phase’ your pension in retirement by taking both the 25% tax-free lump sum and taxable income in stages. Spreading withdrawals over multiple tax years in this way can mean you make the most of tax allowances and avoid paying more tax than necessary.


  1. Falling victim to a scam

According to the Financial Conduct Authority (FCA), nearly a fifth of over 55s and a third of over 75s believe they have been targeted by an investment scam in the last three years. The ability to take a money purchase pension pot as cash in one go means that people with this type of pension could be particular targets for fraudsters.

To guard against being a victim of investment fraud, the FCA advises consumers to, at the very least:

  • Reject unsolicited contact about investments.
  • Before investing, check the FCA Register to see if the firm or individual you are dealing with is authorised and check the FCA Warning List of firms to avoid.
  • Get impartial advice before investing.

There is more information on how to spot and avoid fraudulent investments on the FCA website.


The taxation of pensions is based on personal circumstances and is subject to change in the future. This article is solely for information purposes and does not constitute advice or a personal recommendation. If you are unsure as to whether an investment or a pension is suitable for you, please seek professional financial advice.

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