Opinion: Retaining the 'careful' gene pays dividends
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Those of us sporting a little more than a hint of grey hair like to believe we’re rational, level-headed folk.
And with good cause.
For instance, we sort through our household rubbish before putting it into the appropriate recycling bin. Depending upon prevailing circumstances, our celebrations usually reach their peak just as we realise we’ve had enough to drink. We almost always remain calm when some idiot swerves recklessly across the road without indicating, causing us to brake suddenly. And, when it comes to pensions, we do everything by the book.
Except we don’t.
Millions of people save during their working lives, often when it isn’t easy, in order to enjoy the fruits of their labour throughout a happy and prolonged retirement. However, just as they reach the figurative finishing line, clocking off for the final time, many folks do something completely out of character which can compromise their future, committing several mistakes that are easy to avoid.
For example, a sizeable proportion of people reaching retirement age prefer to draw a regular income from their pension pot (hence ‘drawdown’), but they do so without shopping around to compare the best annuity rates.
It’s incredible that we’ll spend hours checking hotel prices and other travel costs for a long weekend which may cost several hundred pounds, but when it comes to our pensions, worth significantly more money than the cost of an hotel for four nights, we’re happy to stick with the company that managed our savings for years.
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The result is that a poorly timed display of financial inertia often means that people pay more for the privilege of accessing their own money or missing out on a wider range of drawdown options.
Then there’s the folks who are still a decade or so from retirement who conclude that it would be a good idea to draw the 25% tax-free allowance from their pension pot (to which everyone aged over 55 is entitled) in one fell swoop. Unfortunately, a surprisingly large number often get greedy and take just a ‘little more’, a decision which often pushes them into a higher rate tax bracket (because they’re still earning a salary) and their pension savings get hit with a 40% (or higher) charge.
The message in both instances is: look before you leap. Yet there’s one particular action, likely to tempt more people than they would admit, which can be disastrous.
Most retirees will rely upon their pension pot up until the point at which they shuffle off this mortal coil, supplementing the £179.60 state pension, which could hardly be called a King’s ransom. It’s important, therefore, to keep an eye on it, making sure it lasts. That’s the sensible thing to do, isn’t it?
Of course it is, but try telling that to people who can’t wait to get their hands on every penny and proceed to blow the lot.
Economists maintain that we tend to spend more money during our earliest retirement years while we’re still able to travel the world, hike across the Pennines, or sail around the coast, although this doesn’t explain how previously ‘careful’ types end up draining their pension pot, often on fripperies, within a few years of retiring.
Fortunately, most people retain their ‘careful’ gene as they get older which perhaps explains why an increasing number use equity release to supplement their state and private pensions, tapping into often substantial property wealth it has taken a lifetime to accumulate. Thankfully, more profligate types can also fill the pension void, often caused by spending too much too soon, by releasing a percentage of their home’s value.
The equity release process is as straight forward as applying for a mortgage, except the funds released from the home are tax-free and beneficiaries may do as they please with the money.
Granted, some pension pots become depleted earlier than their owner(s) may have anticipated and while this raises the possibility of having to ‘make do’ with the state pension, equity release can offer a mainstream alternative to downsizing or having a less fulfilling retirement.
Equity release isn’t for everyone, hence seeking professional advice before taking the next step is heartily recommended. Of course, being a sensible person, you knew that.