We all need to get our retirement finances in order, and with legislation having provided so much more flexibility these days, we have a lot more freedom in deciding what to do with our pension pots.
But with that extra freedom comes extra responsibility, and I’ve been searching round to see what tips the professionals are offering. Here’s my distillation of their combined thoughts.
Get it planned
If I asked you today for the value of your net assets (what you own minus what you owe), would you have any idea? And do you know what total income you can expect after you finish work, how you’ll achieve it, and whether it will actually be enough to live on?
Or, like most people, will you wait until you retire and hope for the best? I say spend a bit of time and work it out.
Don’t spend too much
I’ve seen plenty of headlines telling us that now we can get hold of our pension nest egg and do what we want with it, we have the opportunity to buy the flash car we’ve always dreamed of or take that luxury round-the-world cruise. And it horrifies me!
No, don’t blow it all on short-term flash living, or you could end up in serious poverty. Think how many meals you could buy for the cost of a Porsche (or whatever).
Tax
I’ve occasionally been asked what’s the point of pension contributions being net of tax if you have to pay the tax when you finally draw it down. I see two big advantages.
One is that you can take a lump sum of up to 25% of your total pension fund free of tax, with no effect on your income tax rates in the year we do it. That’s brilliant, but don’t get overwhelmed by your sack of cash and spend it all.
The other is that after retirement, you still have an annual tax-free income allowance, and there’s a good chance you’ll be in a lower top tax band. Just plan your drawdown carefully.
Strategy
You need an investment strategy, even if its as simple as choosing a managed fund which fits in with your aims and your abilities. Want to leave it to your pension provider? That’s fine — it’s what most people do. Although I have to say, I’d steer clear of annuities myself, as I see them as generally pretty poor value.
The benefits of managing your own investments is at the core of the Motley Fool’s message, and that’s what I’m doing. My pension strategy is to invest in diversified, dividend-paying, FTSE 100 stocks.
Start now
My most important tip is to start investing for your retirement as early as you can. Whether you use a SIPP or an ISA (or both), I reckon you should be saving as much as you can every month towards your old age.
Still young and retirement is a long way off? I felt like that when I changed jobs for the first time, and I took £1,100 in cash from the old company’s pension.
If I could have invested it in shares and got 6% per year, it would be worth around £8,500 now — a full year’s State Pension.