3 ways “doing it yourself” could lead to worse retirement outcomes

The Covid-19 pandemic saw many of us confined to our homes for an extended period. While it was a challenging experience, lots of people looked for the silver lining and took the opportunity to work on their homes and gardens.

Unfortunately, there was an unintended consequence to this increased interest in DIY. According to the BBC, figures from the NHS show that in 2020/21, more than 5,600 people visited hospitals after injuring themselves with power tools.

Another 2,700 people sustained injuries from basic hand tools such as hammers and saws and, surprisingly, 349 people required treatment for lawnmower-related wounds.

So, while DIY might save a bit of money, it can be dangerous. Those people who ended up needing hospital treatment may have wished they’d asked a professional to do the job instead.

You could end up feeling the same about your retirement plan if you take a DIY approach, and a new survey reveals this situation is becoming more common.

79% of people aged 55 and above retired without advice

Seeking professional advice before and during the transition to retirement could help you ensure that you build adequate savings and draw from them in a sustainable way. Ultimately, this might mean you’re more likely to achieve your desired lifestyle.

Yet, Professional Adviser reports that 79% of people aged 55 and above retired without any guidance, opting for a DIY approach instead. Additionally, 29% of respondents said their retirement fell short of their expectations.

This disappointment may have arisen because they overlooked important aspects of retirement planning or perhaps made simple mistakes that they could’ve avoided with professional support. If you take a DIY approach, you could experience similar issues.

Read on to learn three ways “doing it yourself” could lead to worse retirement outcomes.

1. You may underestimate how much you need to save for retirement

New research suggests that you may be likely to underestimate how much you need to save for retirement. Indeed, PensionBee reports that 23% of people surveyed admitted they were unsure of the specific figure they’d need to achieve their dream retirement.

The second most common answer, given by 15% of people, was £150,000. Yet, calculations from the Pensions and Lifetime Savings Association (PLSA) suggest that this would only cover basic needs for 10 years, with almost nothing left over for luxury spending.

Consequently, it could be easy to underestimate how much you need to save for retirement and this might mean you’re forced to make sacrifices to your lifestyle.

Additionally, everybody has their own picture of their dream lifestyle in retirement. As such, your own savings goal is unique and any generic estimates about how much you’ll need to save for retirement may not be suitable for you.

Working with a financial planner could be useful here as we can discuss your desired retirement lifestyle and financial goals with you. Using this information, we will then help you calculate what you’re likely to spend and how much you may need to save.

Having a realistic picture of how much money you need in retirement could mean you’re less likely to have a shortfall in your savings. We’ll also help you calculate contributions to pensions and investments to improve your chances of reaching your goal.

2. You might struggle to make sustainable withdrawals from your savings

Accumulating wealth is only the first part of your retirement planning journey. Once you reach retirement age and finish working, you may need to consider how you will draw from your savings.

If you draw flexibly from a defined contribution (DC) pension, it’s important that you make sustainable withdrawals. Without careful planning, you risk taking too much in the early years of your retirement, meaning that you deplete your savings faster than expected and struggle to fund your lifestyle later. You might also have difficulty paying for certain expenses such as care costs.

Conversely, if you’re too cautious and limit your withdrawals because you’re concerned about running out of money, you could make unnecessary sacrifices to your lifestyle.

Fortunately, if you seek professional guidance, we can help you create a sustainable retirement budget. We can then use cashflow forecasts to determine how long your wealth might last based on your projected spending. Most importantly, we can account for factors such as inflation, life expectancy, or care costs when making these calculations.

3. You could pay more tax than you need to on your retirement income

For many voters, the decision about who to back in the upcoming general election will be based on tax policy. This is especially true for pensioners as many of them could pay more tax in the coming years.

According to Citywire, up to 1.6 million more pensioners could pay Income Tax by 2028. This is because the Personal Allowance – the amount of income you can generate before triggering a tax charge – remains frozen at £12,570 until at least 2028.

Meanwhile, the full State Pension amount is £11,502.40 a year in 2024/25. As such, your State Pension may already use a significant portion of your Personal Allowance before you draw anything from your private or workplace pensions.

Additionally, the State Pension normally increases each year by the highest of:

• Average wage growth
• The rate of inflation
• 2.5%.

As a result, more pensioners are expected to pay Income Tax in the coming years and you may need to consider this when drawing from your retirement savings.

You can normally take the first 25% of your pensions as a single tax-free lump sum (or several smaller sums), up to a total of £268,275 in 2024/25 – your “Lump Sum Allowance” (LSA). If your 25% lump sum is more than your LSA, you may pay tax on the amount that exceeds the threshold.

Once you have taken the 25% lump sum, any additional pension income that exceeds your Personal Allowance is normally taxed at your marginal rate of Income Tax.

So, if you take a large lump sum or withdraw too much from your pension, you could easily push yourself into a higher tax bracket and receive a large tax bill.

That’s why it’s important to understand what tax you’re likely to pay on your pension income and find ways to potentially reduce your liability. Failing to plan accordingly could mean that you pay more tax than you need to.

A financial planner can help with this.

By creating a detailed budget, we can ensure you only draw what you need, meaning you may be able to limit the portion of your income that exceeds the Personal Allowance. Drawing from more tax-efficient sources, such as ISA savings, before accessing your pensions could also help you mitigate tax.

Many people take a DIY approach to retirement planning as they believe it will save them money or perhaps don’t think they need help. However, going it alone could have a significant effect on your quality of life so you may want to seek professional advice.

Get in touch

We can help you make your dream retirement a reality.

Email enquiries@blackswanfp.co.uk or contact your adviser on 020 3828 8100.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

The Financial Conduct Authority does not regulate cashflow planning or tax planning.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.