Long gone are the days of hanging up your hat and retiring at age 65 with an annuity. Retirement is no longer clear-cut; we are often working for longer, in a more flexible capacity. I, for one, am over 65 and had no plans to stop back then!
Sources of pension income have varied considerably too. Changes to pension legislation and historically low interest rates mean that for most people, an Annuity is no longer the default decision. Investments couple with assets such as Venture Capital Trusts (VCTs) and property are likely to be earmarked alongside traditional pension savings to provide retirement income.
Whilst these changes have resulted in more choice and potential reward, the increased complexity means managing your financial security and wellbeing in retirement is more challenging than ever. Ultimately, there are three areas of retirement to address:
1. Your financial wellbeing
Pension Freedoms introduced in 2015 gave greater flexibility in the way you can use your pension savings. After 55, there is now no limit on the amount you can withdraw from your pension. Of course, you will pay Income Tax on the anything above the usual 25% tax-free cash. Facilitating means using Flexi-Access Drawdown (FAD), where your pension remains invested whilst you take an income. This necessitates the continued management of investment risk, whilst maintaining the long-term sustainability of your withdrawals.
Unsurprisingly, research from Legal & General found a positive influence on individual’s wellbeing by having a guaranteed pension income, like an Annuity used to provide. However, you are now responsible for the investment risk and income longevity that an Annuity provider previously took on.
To compound the complexity since 2015 pensions have typically been free of Inheritance Tax (IHT), making them an ideal vehicle to efficiently pass on wealth. So, an effective retirement strategy will now need to;
- Take in to account various sources of income
- Often remain invested for growth and susceptible to market volatility
- Provide a sustainable level of income throughout your lifetime
- Take in to account various tax efficiencies
- Be regularly reviewed to ensure it remains appropriate
That’s a lot to consider when you might be seeking a more sedate, stress-free lifestyle. Naturally, it’s where the reassurance of a well-qualified, experienced financial planner can add real value.
2. Psychological health
Wellbeing and mental health are being increasingly discussed, which can only be an excellent thing. Primarily, understanding your aspirations in retirement is crucial. Beyond that, consider how you will spend your newly found time. If you don’t structure your time, you might find retirement particularly tedious and boring.
Your occupation is quite likely to have been a big part of ‘you’; your social identity. Leaving your profession completely could feel like you are losing a part of ‘you’. There are plenty of options available, from taking on a freelance role, becoming a business angel, or dedicating some free time to a charity or cause close to your heart. In any circumstance, it’s not unusual for the psychological adjustment of retirement to take some time.
Then, during retirement, understanding your natural cognitive bias towards investing is beneficial for helping maintain wellbeing. There are several unhelpful traits that could derail your pension planning, including;
- Regency bias: The tendency to attribute increased impotence to events of the recent past
- Hindsight bias: Where past events seem more important than they did when they happened
- Anchoring bias: The tendency to rely too heavily on, or ‘anchor’, one piece of information
- Loss aversion: A clear preference for avoiding losses, rather than achieving gains
- Framing bias: The way we react differently to a choice, depending on if it’s presented as a loss or gain
- Outcome bias: Where decisions are based on past outcomes, rather than the quality of the process
- Herding bias: A willingness to follow the crowd, without feeling the need to make personal judgements
If you appreciate and understand your tendencies and cognitive biases, you can make better informed, long-term investment decisions. Acting on a gut feeling could be risky if you associate with any of the above. Rational logic will help maintain financial security and therefore your wellbeing throughout retirement.
3. Physical health
Your physical health can influence you mentally and financially. If you are in poor health, you might not be able to enjoy retirement as much as you’d hoped. You might also find you are liable for expensive care costs in later life, making an unplanned dent in the legacy you’d like to leave family.
The key is preparing for the unexpected. This is where cashflow planning can be incredibly powerful; graphically projecting your wealth, and able to take in to account all kinds of future scenarios. It may
Securing your future
Ultimately, it’s a matter of managing known variables, understanding the emotive side or retirement and planning for the unexpected. A robust, regularly managed, financial plan can help you determine all these factors. Retirement planning is much more than the value of your savings, it’s about helping you achieve your ambitions in a sustainable way.
At HFMC our ultimate goal is to help deliver your secure financial future. As specialists within the City, our team of expert Chartered Financial Planners are here to preserve your financial and psychological wellbeing, helping you to achieve the retirement that you planned for.