Flexibility: Friend or Foe?

The new pension rules have fundamentally changed the way that many people should now look at retirement planning…
Previously you had a finishing line, when you typically cashed in your pension for an annuity, which paid out a regular sum for the rest of your life. Traditional retirement planning strategies usually took a long term approach and reduced the risk level of their investments the closer to retirement that you got, effectively protecting you against any unexpected stock market falls (like the big ones of 1987, 2003 and 2009) near to your retirement date.
But the way that Financial Advisors look at things thesedays has to be different. Because you are now firmly in the driving seat when it comes to your pension, your investment lifecycle can be longer, meaning that reinvestment of existing  assets can be happening well into retirement.

You can still take the traditional approach, of course. Annuities still make sense for some people. But what you have now is flexibility. Flexibility is potentially very good, as long as you use the power well.  We’ve had a significant number of new enquiries from people approaching 55 who know that they can get their hands on their entire pension pot soon. The majority have seen beyond the honeymoon period of the liberation of their pension savings and are simply concerned that they make the right decisions on what to do with the money to ensure a good retirement.

A balance of what you might invest in to fund your retirement needs to reflect appropriate timelines. For example, holding shares for 18 years has a probability of beating cash 99% of the time and beating bonds 88% of the time*. Bonds are a popular, lower risk investment which older people have traditionally felt safe with, but they very often do not keep pace with inflation, meaning that your money can be eaten away at in real terms. Given that 18 years is well within the reach of most retirees as life expectancies improve, you may take the view that seemingly higher risk share investments (equities) might be a better option than bonds, which may be steadier but not keep pace with inflation. In other words, you’ve got potentially longer to invest over so you can still take advantage of a potentially more lucrative equities market (as long as previous trends continue).

But do you really want to make these decisions yourself? It’s all interesting stuff, and I’m sure you get the gist of what I’m saying – which is that the new pension rules have changed the game in more ways than the average person realises. But if you’re confused or concerned come and see us. We use the Financial Clarity System to help shine a light on the best routes for your retirement, based on your assets, lifestyle, expectations and attitude to risk.  It seems to me that now more than ever is the time to be taking an interest in your retirement options – and judging by how busy we are as a firm, I’m either right – or it’s a huge coincidence!

 

John

*According to Money Week (28.3.14),

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