Don't be a 'drawdown chimpanzee' when it comes to your pension pot
Do you know what keeps financial advisers awake at night?
Research shows that we worry about ‘unadvised drawdown’ - people drawing cash out of their pension without financial advice.
The Financial Conduct Authority (FCA) tells us a third of people who use drawdown do so without advice, and of those, a third end up with bad investments, avoidable tax bills, or with a pension that could have been over a third higher, if they had just taken advice.
Blissfully untroubled by any knowledge of the highly complex rules, unadvised savers leap into drawdown “like a bunch of chimpanzees staring into the back of a TV set".
(Although the FCA didn’t put it in quite such colourful terms).
Are you considering drawdown? There are three great reasons to talk to the experts. First, you want to avoid large and unexpected tax bills. Two, you don’t want to leave yourself short of cash in retirement. Three, you want protected from the many dodgy investments and scams that have followed the drawdown freedoms since 2015.
First let’s look at tax bills. What we have to remember here – we should write it on a sticker and wear it on our forehead – is that much of the money we take from our personal pension is regarded as income, for tax purposes. We can draw down cash from age 55, even if we’re still working.
Suppose you are in your late 50s, earning £35,000 per year, and you’ve got your eye on a new car, plus some long overdue home improvements, so you want to draw down a slice of your pension.
While a quarter of what you take would be tax-free, the remainder would be taxable, and depending on how much you take, could well push you into the higher rate tax band, which starts at £50,001. All of a sudden you’re paying 40 per cent tax on part of your income for the first time in your life. Ouch!
A better way might be to draw down the money over two years, so that you don’t reach the higher tax band in either year. Your tax stays at your normal marginal rate of 20 per cent, it’s easier on the wallet - and now you can afford the sporty chrome wheels as well (as long as you don’t mind it looking like a mid-life crisis).
Other costs we need to understand are the charges levied by pensions companies in relation to drawdown. There were 44 different charges possible at last count, charges which the FCA slated as “complex, opaque and hard to compare”, adding that “consumers are now required to make more complicated decisions than ever before.” Do not despair - your trusty financial adviser will keep you right.
Point number two: make sure you’re not going to run out of money when you retire.
Ironically, the problem here is that we’re so darned healthy these days. We just refuse to pop our clogs.
The Office for National Statistics (ONS) says that average longevity in the UK is 79.9 years for men and 83.6 years for women (compare that to longevities of around 60 one hundred years ago). However, these are just averages. You can live much longer, and there are far more people in Norn Iron these days living to see their telegram from the Queen, when they turn 100.
Remember also that increased longevity brings with it the need to plan for medical costs and healthcare, costs you did not have before.
I hope you can see that the whole business of pension planning has evolved, not least because of medical advances, better healthcare, and improved lifestyle. Here’s just one ‘fun fact’: if you suffered a heart attack in the 1960s, you stood a 7 in 10 chance of dying; today, you stand a 7 in 10 chance of living. Like a wasp at a picnic, we just can’t get rid of you!
Increased longevity is good news for us, of course, but it’s a tough challenge for our finances. Careful planning and good financial advice have never been more crucial.
Point number three: avoiding dodgy investments and downright scams. The advent of drawdown gave rise to an emerging class of older people who suddenly had cash to invest, but perhaps lacked the financial savvy to invest it - and the bogus operators out there quickly sat up, and took notice. The vultures were circling within hours, or so it seemed, and they’re still at it.
We may get unsolicited calls offering us a free ‘pensions review’ that is followed up with a high-pressure sales pitch offering the chance to invest in a property development in Florida, or a non-UK collective investment scheme not regulated by the FCA.
Or you could be offered items for sale as an investment: one group of shysters in London were flogging flawed diamonds worth about £100 to their hapless victims for £9,000.
These are not fictional scenarios. These scams actually happened. And 1000s more of them are happening, as we speak.
So go on! Stop a financial adviser from fretting. It’s tough enough that we end up standing by ourselves at parties.
Don’t be a ‘drawdown chimpanzee’ - take our advice today!
Michael Kennedy and Shaun Doherty are independent financial advisers and pensions specialists, and can be contacted on 028 71886005 . Further information on Facebookat “Kennedy Independent Financial Advice Ltd” or at www.mkennedyfinancial.com