The new pension freedoms planned for April will provide unprecedented…
We all regularly go for a dental check-up to make sure that everything is ok and to prevent serious medical problems developing in the future. However, when it comes to financial check-ups, I’m finding that retirees, in particular, aren’t really appreciating just how important these regular meetings might be.
An annual financial check-up will ensure that all your planning remains on track. A regular meeting with your financial adviser is important especially for retirees and vital if you are in a drawdown contract. Since April 2015 new drawdown plans have no limit on cash withdrawals and therefore this situation is ripe for things to get out of control. One of the main risks of drawdown plans is the risk of ruination (the risk of outliving your assets), whereby a combination of unfavourable investment conditions and excessive withdrawals could wipe-out your pension fund completely and leave you without a vital source of retirement income. A regular check on the level of your income and an analysis of how sustainable your current income is in existing investment conditions is therefore vital to your financial situation. An annual check up can indicate if you are taking too much out of the pension pot and can help you to decide on a level of withdrawal which attempts to be both adequate and sustainable over the next 12 months. Veering off track can mean that you start to eat into your pension pot and this might be painful to put right if the situation is neglected for too long. Keeping track of your income is extremely important, especially if you need your fund to be available to a surviving spouse.
Current longevity tables are demonstrating that life expectancy continues to increase. For instance, currently, a couple aged 65, in good health, would need their pension drawdown plan to provide income for at least *31 years and there is a 50% chance of living beyond this point. As you can see, retirement is a long term situation and your investment and pensions may have a long term investment horizon. As we all know, an awful lot can change both politically, legislatively and economically over 3 or 4 years. Over the longer term you may even find yourself in a completely different financial landscape. The world is a very different place now compared with 10 years ago. Sometimes a financial check-up can prevent you taking a very detrimental course of action that could lead to tax difficulties, investment nightmares and inflexibility in your retirement income. Therefore, taking stock regularly is important. In terms of investment funds, again, what was suitable years ago might not be the best place to be invested at the moment. In later retirement, you may not be able to deal with asset allocation and rebalancing funds regularly and therefore, unbeknown to you, excessive and/or unwanted risk may creep into your pension fund.
Moreover, it’s important to be able to compare your options regularly – although annuity rates are not very attractive at the moment, I dare say, that, sometime in the future, this product might become a good deal more attractive. Once interest rates move into an upward cycle, annuity rates might become more attractive. As you go through retirement you are also more likely to suffer health issues which may qualify you for enhanced/impaired annuities and therefore it’s important to continue to consider all retirement options. For some clients, simply dealing with the investment demands of drawdown might become too burdensome in later retirement.
For some, however, the death benefits available under drawdown will continue to be the most attractive option for them and therefore growing and nurturing the fund will be important to family wealth and might be a strong reason to remain in drawdown.
The important point is that no-one is the same; different situations, family needs, health, tax and a whole heap of other issues means that your financial situation is unique to you and needs to be regularly reviewed and updated and it’s probably a lot less painless than a trip to the dentist !
* Information for Just (enhanced and impaired annuity providers) based on female life age 65 and in good health.
The article is for information only, it is recommended that you seek independent advice before taking any action.