We’ve banned our clients from using the word ‘retirement’. We prefer calling it ‘financial independence’, because it’s when you’ve built up enough money to stop working. With that in mind, next month we’ll talk about the positive aspects of giving up paid work. Meanwhile, this month’s article focuses on pension myths.
If you’re not yet ready to claim your pension but you can see it looming somewhere on the distant horizon, there are a number of things you need to think about now.
First, you need to be aware that many things have changed over the years. (Not just the fact that flared trousers have been in and out of fashion more times than we can count.)
For one thing, when you started work, the standard state pension age was 60 for women and 65 for men. It’s all different now.
What’s more, you might not receive as much state pension as you’d originally hoped.
In your youth, you might have been told you should save the same percentage as your age into a pension, from 20% at age 20 to 60% at age 60. Or that you should hold the % of bonds equivalent to your age. Or that you should move your investments from equities to cash as you near retirement.
Not all that advice is true any more. The first two statements are not entirely wrong, but we don’t recommend the last one any more.
Pensions have changed. Unless you’ve been living under a rock, you’ll know that you no longer have to buy an annuity with your pension fund on retirement. Pensions are now more like regular savings. And they’re flexible, for example, you can withdraw up to 25% tax-free from the age of 55.
The amount you withdraw is critical. The more you take out (especially if markets are low), the less money there is in your fund when markets recover.
You really want to hold onto your equities for as long as possible, because that’s the only way to get the best return.
When you’re no longer working in gainful employment, you’re no longer earning money, so you’re no longer putting into the pot. You can’t accumulate any more than you’ve already got. So you need to have a drawdown strategy that works for you.
Here are some of the questions to ask yourself:
- How much money do you want and need to live on after you stop working?
- How much risk are you prepared to take?
- How will the markets perform over time? (If you wait long enough, they’ll go up.)