The retirement investing mistakes that could cost you dear

Last month the Financial Conduct Authority (FCA) published its Retirement Outcomes Review, a long-awaited report on the pension freedoms.
Tom Selby
13 July 2018

Among other things, the FCA found around a third of retirement investors who don’t have an adviser are entirely invested in cash.

While this might be sensible if you are planning to withdraw money from your fund in the near future (and so want to avoid any stockmarket fluctuations), it is unlikely to be a good long-term strategy. In fact, the FCA says over a 20 year period someone could increase their annual income by a third if they invested in a mix of assets rather than just cash.

Tom Selby, senior analyst at AJ Bell, looks at four other common mistakes retirement investors make.

Overpaying in charges

“Small differences in the costs and charges you pay for investing your pension can make a big difference over the long-term. When it comes to taking an income from your retirement pot, the FCA says total charges range from 0.4% to 1.6%.

“By switching from a higher cost provider to a lower cost provider, the regulator says you could increase your annual income by 13%.

“This is one of the reasons why it’s critical you shop around before choosing both a provider and your retirement income option.”

Taking too much risk while making big withdrawals

“While taking too little risk in retirement could cost you dear, taking too much risk at the same time as making big withdrawals could spell disaster for your long-term plans.

“Take someone who invests a £100,000 fund in the FTSE All Share, paying 1% in pension and administration charges. They withdraw £10,000 a year in income from their pot.

“If they had started taking an income in 2007 – just before the financial crisis hit – they would have withdrawn £100,000 by December 2017 but be left with just £16,400 left in their fund.

“If the same person started taking an income at the end of 2008 – at the beginning for the Bull-run – they would have taken £90,000 of income and still have a fund worth over £113,000.

“This just shows how a market downturn out of an investor’s control can potentially ruin their retirement plans. While it might be difficult to predict when a shock is going to hit, you need to consider what would happen in the event of a downturn. Sticking your head in the sand could end in disaster.”

Failing to monitor investments and withdrawals

“For many people their pension will be the most valuable asset they own, with the possible exception of the house they live in.

“Savvy investors will not only know where their money is invested, but also regularly review those investments and how much they are taking out to make sure both remain appropriate.

“However, many investors simply don’t engage with their retirement pot. For example, the FCA found one in three people who had gone into drawdown recently had no idea where their money was invested – possibly because they were simply after their 25% tax-free cash.

“By failing to regularly review investments you risk causing untold damage to your long-term retirement plans.”

Assuming any untouched pension will automatically pass to loved ones when you die

“Alongside the introduction of the pension freedoms in 2015, the Government drastically improved the death tax regime for pensions.

“Savers in drawdown can now pass on any untouched funds tax-free if they die before age 75, or at their recipient’s marginal rate of income tax if they die after.  No inheritance tax is normally due. This is now one of the major attractions of drawdown for many people.

“However, savers often fail to nominate who they want to receive their pension or review their choices in the event circumstances change.

“Anything from the birth of a child to divorce or change in family circumstances could alter who you want to receive your fund when you die, so regular checks are absolutely essential.

“It’s also important to note that bequeathed pensions need to be designated to your beneficiary within two years of your death. This simply means it needs to be transferred into your beneficiaries’ names.

“The key point here is that none of this stuff happens automatically, so if you want to use your pension as an IHT-efficient vehicle you need to get your house in order today.” 

Tom Selby
Head of Retirement Policy

Tom Selby is a multi-award-winning former financial journalist, specialising in pensions and retirement issues. He spent almost six years at a leading adviser trade magazine, initially as Pensions Reporter before becoming Head of News in 2014. Tom joined AJ Bell as Senior Analyst in April 2016. He has a degree in Economics from Newcastle University.

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