Your starter guide to pension freedom
First published 21 October 2015 • Updated 23 January 2017
You may be excited by the prospect of more choice in retirement – but you’re probably also worried about the risk of getting it wrong. In our guest article, retirement expert Billy Burrows offers a quick and simply guide to the big questions you need to think about first.
The words of my school headmaster still ring in my ears: ‘Freedom is not licence!’ he used to say. They are all the more resonant today, six months since the start of pension freedom. This makes it possible for you (if you are over 55) to take your pension pot as a cash sum or as regular income payments. But as my old headmaster might say, ‘Having pension freedom is not a licence to spend your money unwisely.’
Some might protest that this is patronising to pensioners. No, it’s not. Pension freedom was a conscious move by the government away from the ‘nanny state’, to give you complete choice over how you spend your pension pot. But that also means that, if you use your freedom unwisely, the only person who’ll be disadvantaged is you.
The top six questions, the top seven risks
So how do you spend your pension pot ‘wisely’? I’ve spent over 20 years pondering this very question, advising clients from all walks of life about the best way to convert their pension pots into income. My conclusion is that it’s now simply too difficult for most people to make the right decisions without first speaking to an expert. Your pension provider can tell you about your existing plans, and Pension Wise (the government-sponsored service) can outline your broad options, but the only person who can give you genuine, impartial advice is an independent or whole-of-market financial adviser.
But once you’ve found your adviser, exactly what questions do you ask? The most important one is, ‘How much cash and income will I need to last me through my retirement?’ But there are plenty of follow-up questions too, such as:
- How can I keep my tax to a minimum?
- What will happen to my money after my death?
- Should I choose an annuity or drawdown plan?
- What alternative options are there?
- How much risk should I take?
Getting answers to the above will give you a clearer grasp of your options. But as well as knowing how you can take advantage of pension freedom, you also need to understand what could go wrong. Common pitfalls include:
- Putting short-term gains before longer-term financial security
- Getting caught out by pension scams and high pressure salesmen
- Paying too much tax
- Purchasing an annuity or drawdown scheme without first shopping around for the best deal
- Taking too much income from drawdown (increasing the risk of running out of money)
- Taking too much risk, or being unaware of the different kinds of risk
- Not seeking expert financial advice
Now you can plan in more depth
How you spend your pension pot is now a matter for you and nobody else. You are free to take your pension in cash if you wish, or you can secure a guaranteed income, or you could do anything in between. It really is your choice.
You don’t need someone preaching to you about the consequences of blowing your pension pot on holidays and luxuries – but what you probably do want is for someone to help you understand all of your options, and set you on the road to making the most of your pension savings.
Remember, in the end retirement really is just like a long holiday. The goal is to enjoy it to the fullest – while ensuring that you still have enough money left at the end to see you back to passport control.
I’ve gone into a lot more depth on these tips in my new guide, in association with Prudential, ‘You and your pension pot when you retire’. You can download a free copy of it from www.williamburrows.com or by emailing me at [email protected].