In 2015 Pension Freedoms were introduced to give retirees far more flexibility in how and when they access their pension savings. But, along with additional flexibility came the responsibility to ensure that it lasts throughout retirement. Worryingly, research indicates that financial pressures mean a quarter of retirees are struggling.
Pension Freedoms mean the majority of people can start accessing their pension from the age of 55 (rising to 57 in 2028), a point in life where many are still working. Retirees can then choose from a range of options when deciding how they want to access the money, including taking out a lump sum, receiving a flexible income, or purchasing an Annuity to secure a guaranteed income for life.
The overhaul in how we access pensions were designed to allow retirees to create an income that suited their lifestyle, goals and savings. However, figures suggest that some retirees haven’t considered the long-term financial implications of when or how they access their pension.
The latest figures from HM Revenue & Customs (HMRC) show that more than half a million over 55s accessed their pension in the last tax year alone. In total, they withdrew £8.18 billion to fund their lifestyles, an increase of 23% compared to the previous year.
Stepping out of retirement
Further research from Zurich found many retirees are heading back to work after dipping into their pension. In fact, one in ten people who have accessed their pension since 2015 have gone back to full or part-time work or say that they intend to.
There were many reasons for doing so, including regaining a sense of purpose and boosting their social life. But, 26% returned because they were struggling financially.
Alistair Wilson, Zurich’s Head of Retail Platform Strategy, said: “There’s no doubt the Pension Freedoms have been hugely popular but for some retirees, they have come at a high price. People now face more complicated decisions in retirement – including choosing where to invest their savings and how much to withdraw – and it’s clear not everyone is getting it right. Pensioners who don’t plan for retirement, and get financial advice or guidance, could face a return to the grindstone or an improvised old age.
“Making a mistake with your pension in later life can be financially devastating – especially if you can’t go back to work.”
Calculating your retirement expenses
As you approach retirement, you should spend some time evaluating what assets you have to provide an income. This may include:
- State Pension
- Defined Benefit Pensions
- Defined Contribution Pensions
From here, you can see which assets will provide you with a guaranteed income, such as your State Pension and a Defined Benefit scheme, and the shortfall that will need to be made up from other sources. Factoring in life expectancy is just as important as budgeting for your desired lifestyle. How long does your pension need to last? The majority of people underestimate how long they’ll live for, potentially leaving them with an income gap in later life.
The fact that people are returning to work within a few years of retiring suggests the risk of spending too much too soon is real issue for some. Taking the time to understand your potential income and how long it needs to last for can put you on the right track for sustainably making withdrawals.
Planning your retirement lifestyle
It’s not just the financial side of retirement that should be planned either; your desired lifestyle is just as important.
Often the retirement milestone is one people look forward to, marking a period when they’ll have more time on their hands to do the things they enjoy. But, the research from Zurich suggests that reality fall short of expectations for thousands of people. When asked why they were returning to work after accessing their pension, survey participants said:
- They needed a sense of purpose (41%)
- Missed the social side of employment (35%)
- They were bored in retirement (20%)
- To get away from their partner (8%)
Effective financial planning should consider both your financial position and your overall goals. You may decide that maintaining some form of work in early retirement is right for you, whether it’s a part-time role or freelancing. Alternatively, you might be ready to leave the world of work behind you. Whichever option you choose, you should look at how you’ll fill your free time.
Often, it’s the big plans that spring to mind. But, the little everyday things will have just as much influence on how much you’ll enjoy retirement. Thinking about how hobbies, socialising and more will fit into your schedule. This will help set out the foundations for a retirement that’s right for you.
If you’re approaching retirement or have already accessed your pension and would like to better understand your financial stability over the long-term, please get in touch.
Please note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.