Flexibility and freedom may be the current pension buzzwords, but those people who are on the verge of giving up work are advised to consider their options very carefully
In recent years, the retirement income landscape has been transformed. Keeping your pension money invested and making flexible withdrawals is the “new norm”. But freedom doesn’t come without risks, and the Financial Conduct Authority has been looking into the danger zones created as a result.1 Quilter pensions expert Ian Browne highlights four lessons pension customers can take from the FCA’s Retirement Outcomes Review (Final Report, MS16/1.3, June 2018).
1. Take advice
“As you near retirement it is crucial to take advice. The FCA says non-advised customers almost always stick with their existing pension provider instead of shopping around. An adviser will help you find the best value retirement income product to meet your needs. Most offer an initial consultation at their own cost, so you can decide if their service suits you.”
2. Pensions are a good long-term investment
“Half of customers are taking their pension savings out but not actually spending them. Instead, they are investing in cash, Isas or buy-to-let. They are giving up the advantages pensions offer, such as future tax-free investment growth. Cash is unlikely to produce good long-term returns and illiquid assets such as property present their own risks. A financial adviser can help to find an investment portfolio that matches financial needs with your retirement goals.”
3. Ask if you need to touch your pension
“Pensions are not usually included in your estate on death, so inheritance tax could be saved. Any unused drawdown funds could be passed on and will be tax-free, or taxed at the beneficiaries’ marginal rate of income tax. It might be more tax-efficient to leave your pension invested and use other assets first. The FCA found that 94pc of consumers who made a full withdrawal had other sources of income available to them.”
4. Ask if you can afford to retire early
“The FCA says that consumers rarely considered ‘the broader issues around how much they would need to live off ’. The risk is that they get carried away with their spending. You should have a plan in place to see you all the way through retirement. Don’t just focus on now.” Remember, investments may fall as well as rise in value and you may not get back what you put in.
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1 fca.org.uk/publication/market-studies/ms16-1-3.pdf. The facts and figures quoted from this report may not be the most up-to-date statistics available. Advice will be provided by an appointed representative of Quilter Financial Services Limited or Quilter Mortgage Planning Limited, which are wholly owned subsidiaries of Quilter plc. Quilter plc products and services are provided through its two divisions: Advice and Wealth Management and Wealth Platforms. For a list of its companies and their regulatory authorisation details, visit quilter.com. Quilter plc’s business is registered in England and Wales. The content of this promotion has been approved by Quilter Financial Services Limited and Quilter Mortgage Planning Limited. Quilter Financial Services Limited and Quilter Mortgage Planning Limited are entered on the FCA register (fca.org.uk/register) under reference 440703 and 440718.