21st March 2018
“By failing to prepare, you are preparing to fail.”
Wise words from US Founding Father Benjamin Franklin, who is also attributed with coining the phrase: “An ounce of prevention is worth a pound of cure.”
Safe to say, he liked being ready for whatever the future had in store for him.
Which is exactly the attitude you need to have toward your retirement planning.
There are five threats to your financial security in retirement and each can be prevented with a mix of financial planning and common sense.
1. Having no money in later life
Running out of money is a potential issue at all stages of life. But usually there is a light at the end of the tunnel in the form of pay day. In retirement, the safety of additional income is removed.
The most common reason for running out of money in retirement is spending too much, too soon. Since the introduction of Pension Freedoms in 2015, the ways in which you can access your pension fund have changed. It is now possible to combine any of the following options:
- Take a 25% tax-free lump sum
- Buy an Annuity
- Leave money invested to benefit from tax-free growth
- Withdraw money on an ad-hoc basis
With no limit to the amount you can take out.
Of course, this freedom means there is the potential for overspending and reducing the money you have left to live on.
Another possibility, is underestimating your life expectancy. Almost four fifths (78%) of over-50s underestimate how long they have left to live, some by as much as eight years. (Source: Retirement Advantage)
To combat both issues, a robust and flexible financial plan is necessary, that way, you can make sure that you have enough money, year-to-year, for as long as you live.
2. Losing value to inflation
You could use your pension fund to buy an Annuity. This will provide a guaranteed income which increases in line with inflation each year. However, very few people purchase an inflation-linked Annuity. Therefore, you will need to make sure that your income can rise in line with inflation; and that means reviewing your savings.
Without securing above-inflation growth for your savings, you will find that the increasing cost of living means that the buying power of your pension is decreased and that you have a less liveable income than planned. Therefore, securing returns which help you to retain your capital’s buying power is vital.
3. Unexpected care costs
As we get older, the chances of needing to pay for care increases. How much care will cost depends heavily on the type of care needed, the area you live in and how long you will need help for. UK Care Guide offers a care cost estimation calculator which could help you to see how much you will need.
In some areas, care can cost as much as £1,000 each week, so careful planning is necessary, if you are to afford that and remain financially stable.
Unfortunately, the best laid plans can go awry, and you may find that you need to pay for care earlier than you had anticipated. Without a flexible financial plan, this could mean that you run out of money or are unable to afford the level of care you need. Your financial plan should account for this and have options available for all eventualities.
For most people, there is very little state help available for the cost of care, so if you need it, you will have to pay for it.
4. Being unable to leave a financial legacy
Some people have a clear idea of what they want to leave behind for their loved ones. Meanwhile, others are more willing to see how things play out and leave whatever they haven’t spent. If you are in the first group, then you will need to spend your money wisely to make sure that the amount you want to leave behind is not needed to support your own lifestyle later.
If the amount you are leaving exceeds the £325,000 tax-free limit for Inheritance Tax (IHT), you will need to plan to offset the IHT payable by your loved ones.
5. Falling foul of financial scams
Unfortunately, financial scams targeting retired people are on the rise:
- Over 1.8 million people over the age of 50 were targeted by pension scammers in just three months in 2017 (Source: Retirement Advantage)
- Between 2014 and 2017, pensioners lost a total of £43 million to scams (Source: Age UK)
- In 2016, pension scam victims lost an average of £32,000 each
Fortunately, new legislation is on the way which aims to put an end to pension cold callers. However, that is no excuse to be any less vigilant. Remember, the phone is not the only way that criminals can contact you. Be wary of unsolicited contact by post, e-mail or even in person.
Remember the golden rule of unsolicited offers: if it seems too good to be true; it usually is.
For more information, or to talk about your retirement plans, get in touch with Ben on 0113 262 1242.