Top pitfalls when you reach retirement and how to avoid them

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For many of us, retirement conjures images of rest and relaxation, more time to travel and get things done around the house and in the garden.
But a comfortable retirement requires an income, and it can be tricky to know how best to take your pension when you haven’t done it before.
There are some common pitfalls that could trip you up on the way but, the good news is, avoiding them isn’t as hard as you might imagine. And there is always help on hand from Pension Wise, the Government’s free and impartial guidance service.
Here are some of the top pension pitfalls and how to avoid them to get you started.

Leaving it late to start saving
This isn’t technically a pitfall when you reach retirement age but it’s important to bear in mind before you get there.
You may have just started working and retirement may be decades away, but the earlier in life you start saving into a pension, the less you have to save each month to build up a decent pot.
It’s never too early to put money into your pension.
Employees also contribute towards a workplace pension, sometimes matching your contributions, which means the more you put in, the more you get paid.
Once in your pension pot, your savings will be invested, meaning they have longer to grow over time. This is both because of time invested in the market but also because any income you earn from your investment is reinvested, allowing you to earn returns on a larger amount than you put in.

This is known as compounding and over time it can dramatically grow your savings and could make a big difference to the amount you have to retire with.
Don’t despair if you have left it later to start saving however.
It’s never too late to start: you can work out exactly how much you’ll need to put away to fund the retirement you envisage using This is Money’s pension pot calculator.
When you reach your state pension age, you also don’t have to stop saving into your personal pension. As long as you’re resident in the UK, you’re entitled to save into your pension and get tax relief up to the annual and lifetime limits set by Government up until the age of 75.

Leaving your investment strategy unchanged throughout your lifetime
Saving into a pension usually means leaving your money invested for the long term. This is because there are onerous penalties for withdrawing your money from a pension early – it’s not like a savings account that lets you access your savings whenever you like.
If you start saving into a pension early, this means that your money stays locked away for longer and therefore has more time to grow.
In general, the earlier you start saving the more risk you can afford to take on your investments.
This is because while there might be volatility over the short and medium term, this should smooth out over a longer period of time, and in general stock markets have risen overall over the long term.
So you should be able to invest in higher risk, higher return investments earlier in life as they have longer to grow, smoothing out this volatility.
As you get closer to your retirement age, you might want to transfer your investments out of higher risk investments and into lower risk ones.
For example – in your 20s, your pension might be more heavily invested in equities (or equity funds) while in your 60s, more of your pension might be transferred into lower risk assets.
A financial adviser can help you to balance your investments in a way that suits your appetite for risk as well as how long your pension will remain invested.
As your priorities change over the course of your life, it’s a good idea to review this balance.

Accepting what your pension provider tells you without shopping around
The pension provider you have saved with will not always offer all types of pension products for when you retire. Some also focus their specialism on providing one type – an annuity or drawdown for example.
This may mean they offer competitive products in one category but not in another.
When you reach your ‘selected retirement age’ – the age you agreed to retire – your provider will usually send you a ‘wake-up’ pack.
This will probably contain information on only the products they offer, although many providers do include information suggesting you could get a better deal by shopping around other providers.
They won’t go into detail on this, though it’s likely that new rules will mean you can compare rates more easily after September this year.

Going it alone – get guidance
Working out what to do with your pension savings can be daunting when there are so many options. But you don’t have to go it alone and there is free help available.
Whatever you decide to do with your pension savings, it’s a good idea to take advantage of the Government’s free guidance by making an appointment with Pension Wise.
You can go online, book an appointment to speak to someone over the phone or see someone in person at one of hundreds of sites around the UK by calling 0800 138 1583.
This service is designed to help you understand your options but it won’t make a recommendation for what you should or shouldn’t do. That decision remains yours.
If you want more specific financial advice on what to do with your pension savings, it may be a good idea to see a financial adviser who will be able to provide you with a retirement plan and help choosing the best value products for you.

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This entry was posted by John on Wednesday, April 26th, 2017 at 4:23 pm and is filed under Pension news.