Guidance around saving for retirement is among the most common advice sought from financial advisors. However, an exhaustive study by the People’s Pension found many older savers have not taken the advice received to heart. The in-depth research, which included interviews with sample groups conducted since 2015, showed many savers seemed to be sleepwalking into retirement. Many people are not planning adequately or saving enough money. When they finally opt to open pension plans, they are also making bad investment choices. We can sum up the main points of the study with three fundamental problems older savers are facing.
1. Avoiding preparing for retirement
The research highlighted how only one in ten is making detailed plans for their pension. This finding is shocking. You should make sure you’re not one of the nine in ten without a plan! Many of those interviewed stated the reason they are putting off planning for retirement is fear.
You shouldn’t risk your chances of having a nice retirement because you are afraid! The truth is you can still start saving for your retirement even if you are over 50. You might not have as big of a pension pot as you could have if you started in your 20s. But with careful planning, you can still make sure you’re not one of the people at risk of running their pension dry in retirement.
When you are preparing for pensions, you should consider:
- What your state pension looks like?
- Do you know about all of your workplace pensions?
- How much money do you need to maintain your current lifestyle?
- When do you want to retire? How many years do you have to work to grow your pension pot to a reasonable size?
Answering these tough questions might not always be easy or fun, but it is crucial. You’ll have a smoother transfer to retirement and more stress-free days to enjoy it all.
2. Not saving enough
The study also found significant problems with how much people are saving. Only one in 20 considered the impact of inflation on savings, for instance. People don't take the time to figure out how much money they'll have at their disposal. It's crucial to ensure you know how much income your current pension pot will generate. Examine your state pension and private pension, and calculate the total retirement income you could expect to receive.
Part of the issue comes from people underestimating how long they’ll live. According to the People’s Pension study, hardly anyone expected to live to 100 and beyond. Thinking you’ll still be around at 100 can seem like a crazy idea. However, according to Office for National Statistics data, the number of centenarians in the UK is rapidly growing. Look at your pension pot and see when it would run out. It might be worth working a few years more to ensure your pension will last longer. Even part-time job opportunities are something worth considering.
You also shouldn’t be worried about saving money ‘for nothing.’ Most pension options allow beneficiaries to inherit your pension. Even if you don’t withdraw the full pension before you die, your loved ones might still benefit from it. You can find more about what happens to your pension from the government website.
3. Making ill-informed investment decisions
Pension freedoms mean that pensioners have a lot more choice regarding where they invest their money and how they choose to use it. The majority of pensioners currently favour keeping their pension invested and drawing out an income on top of their tax-free allowance.
However, many are not investing the money wisely, and some pensioners are also taking money out too quickly. According to the research, most pensioners don't understand how these investment schemes work. At the same time, seeking out financial advice can bring a considerable cost, with different fees included in the service. Instead, many choose to make their own investment choices but without doing the necessary research.
Pensioners are also accessing their retirement income too soon. Cashing out part of your pension early can seem like a good idea. You can withdraw 25% tax-free. If you need a bit of extra cash, you could be tempted to use your pension. But as the research suggests, it can leave you with reduced pension income as you get older.
Changes to help people make more informed pension decisions are on the way.
From February 2021, anyone putting pension money into drawdown will receive four offers on how to invest the money. The aim is to make sure pensioners have more access to solutions that suit them and better understand their investment options. When the Financial Consumer Authority (FCA) announced plans for these changes in 2019, it specifically pointed to a desire to improve consumer understanding. Christopher Woolard, executive director of strategy and competition at the FCA, said, "We found that around one in three consumers who have gone into drawdown recently are unaware of where their money is being invested…[resulting in] poor consumer outcomes.”
These developments should provide more information to consumers, but it's still important to do your research.
Prepare well and enjoy your retirement
If you are closing in on retirement, it's essential to avoid these three mistakes. Make sure you prepare and plan your retirement. Understand what your pension income will look like and consider different options in terms of investing your pension. If you feel overwhelmed, don't forget to consider seeking expert advice. You can find a wealth of free information online in the form of guides, but paid advice can sometimes be worth it as well. The main thing you must do is face your situation and avoid sleepwalking into retirement.