Time to take control
Posted on: 21-02-2016
The 2015 pension freedoms have seen more people take up the option of keeping their pension fund invested in retirement, but doing so could require a different plan in the final few years of working.
With the stakes so high around saving up a pension, it is no surprise that many of us leave it in the hands of the experts, rather than managing it ourselves. What this means is letting our pension provider determine how and where to invest our savings, with the aim of growing its value further for when we need it.
Yet with the advent of the new pension freedoms, introduced last April, taking a greater interest in your pension, before retirement, is an increasingly important consideration.
The new rules have ended the requirement to use at least 75% of a defined contribution pension to arrange a retirement income, such as purchasing an annuity. It means that more people are keeping their pension fund invested in retirement (for example through income drawdown), and then taking an income or making withdrawals as and when they need to. In November 2015, the Association of British Insurers reported that, since the reforms, £2.85 billion has been invested into 43,800 drawdown products.
The advantage of keeping your pension invested, in retirement, is that this pot of money can potentially still grow in value, depending on the fortunes of the fund(s) it is invested into. This could result in a higher retirement income, and better standard of living, in your later years. That said, there are obvious risks to remaining invested, compared to the security of an annuity, such as if markets fall, this could have the effect of the retirement pot value falling too. Taking too much income could also significantly reduce the pot’s value too quickly.
For this reason, it’s important to regularly review your invested pension pot in retirement, potentially with the help of a financial adviser. That way, you can determine if it is performing in a way that suits your lifestyle and future goals – and perhaps, as you get older consider whether it might be appropriate to withdraw the remainder or trade it in for a guaranteed annuity income.
It’s also important to pay greater attention to your pension pot before you retire. If your savings are currently being managed by your pension provider – such as through their default fund, or if you elected a life-styling approach – you need to make sure it continues to be positioned suitably for both the build up to, and point of, retiring.
This is because your pension provider may automatically start to reduce the level of risk your money is exposed to, as you get to 10 or five years away from your expected retirement date. This is done to protect your capital, and minimise the risk that you lose out if markets were to suddenly fall drastically, just before you retired.
Yet if you plan to remain invested in retirement, you might not want to reduce your level of risk in this way. Doing so could mean you miss out from market rallies, for example. If you are in a provider’s default fund, it may also mean that your money is exposed to a lower level of risk than you would be prepared to take, and that you aren’t achieving the growth you might be able to achieve from a higher risk fund.
The value of investments and the income from them can fall as awell as rise and is not guaranteed. You may not get back the amount originally invested.
For help and advice on your personal and business finances, please contact us to arrange a free, no obligation consultation.