American mountaineer Ed Viesturs, who has climbed Mount Everest seven times, once said: “Getting to the summit is optional; getting down is mandatory.”
According to figures published in the British Medical Journal, 192 of the 212 deaths on Mount Everest between 1921 and 2006 were above base camp. Of the climbers who died after scaling more than 26,000 feet, 56% died on their descent and 17% died after turning back. Just 15% of climbers died on the ascent up Everest or before leaving their final camp.
So, what does this have to do with your pension?
When you retire, the chances are you’ve diligently saved for decades during what we call the “accumulation” stage. However, much of the risk comes during what we call the “decumulation” stage – when you start to draw from your savings (the descent from the summit, if you will).
New research has revealed that a worrying number of people are not taking advice at retirement, which could have a profound effect on their lifestyle in later life.
Read on to find out why taking advice at retirement is so important.
Four in five unadvised retirement clients taking no guidance at all
Recent research from the Financial Conduct Authority (FCA) shows that 340,133 of the 434,407 defined contribution pensions first accessed in 2019/20 without regulated advice were taken with no guidance at all.
That’s almost four in five pensions accessed without either financial advice or using the government’s guidance service.
The FCA figures show that for pension pots accessed without advice in 2019/20, the proportion taking guidance was:
- 18% of the 290,696 pots that were full cash withdrawals
- 26% of the 70,934 pots placed into drawdown
- 18% of the 21,429 pots accessed via UFPLS (lump sums)
- 40% of the 51,348 pots used to buy annuities.
These are worrying figures, as it suggests that most people are taking their pension savings – designed to help them to maintain their lifestyle through retirement – without any financial advice at all. This can have a range of negative consequences.
1. You could pay more tax than you need to
If you decide to cash in your pension without advice, you could end up losing a significant amount of your savings to tax.
If you withdraw the pot as a lump sum, it’s added to your income for that tax year, and is subject to Income Tax. It could easily propel you into a higher tax band which means you could lose 40% or 45% of your pension pot to tax.
This could easily cancel out the tax-efficient benefits of pension saving. Also, losing a substantial amount of your savings to tax could mean you don’t have enough money to sustain your lifestyle in retirement.
2. You might be forced to take advice if it’s a defined benefit (final salary) pension
It is possible to transfer a defined benefit (final salary) pension from a current or former employer into a defined contribution (money purchase) pension.
If you are considering this, and the pension you want to transfer has a value of £30,000 or more, the law states you will have to take financial advice first.
An adviser is required to provide proper, independent advice about a potential transfer – they will not simply sign a form so you can go through with the transfer.
For most people, transferring a final salary pension will not be in their best interests, so speaking to a professional is recommended (or, as above, mandatory by law).
3. You are more likely to run out of money in later life
Research published in Money Marketing has found that clients who don’t take advice before drawing their pension are three times more likely to run out of money compared to those who took advice.
This is mainly because clients who don’t seek advice withdraw their funds at an unsustainable rate. This means they often deplete their savings, with FCA retirement income data showing 40% of withdrawals were at an annual rate of 8% and over. Sustainable withdrawal levels are typically closer to 3% or 4%.
Decisions concerning how you draw your pension are likely to be some of the most important you will ever make. The choices you make will affect your lifestyle for decades to come and the amounts involved can often run into many hundreds of thousands of pounds.
Considering how important these decisions are, it is prudent to seek professional advice.
Get in touch
If you’re thinking about retirement, or would like to explore your options, please get in touch. Email email@example.com or contact your adviser on 020 3828 8100.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The value of your investments (and any income from them) can go down as well as up, 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. Levels, bases of and reliefs from taxation may change in subsequent Finance Acts.