According to a recent survey by retirement solutions provider AXA Wealth, around a third of people are waiting until just six months before retirement until they seek advice about their pension, and some even wait until the point of retirement. But providers and advisers argue that you should start saving and planning as soon as possible.
People, on average, are living for longer - there is a nearly 50 per cent chance that at least one person in a couple aged 65 will live until 89, and a 25 per cent chance that one of them will live to 93, according to AXA's research. This means that your pension pot will have to last longer in retirement. So the earlier you want to retire, the sooner you should start saving and planning.
Early action is important because of the range of retirement options now available. Having an idea of the kind of retirement income you want to take is important because where you invest in the final stages will differ. "If you are going into drawdown your investment strategy will be similar to what you have done until then," says Steve Laird, senior partner at independent financial adviser (IFA) Carrington Wealth Management. "If you opt for an annuity you will need to de-risk in advance."
The more specific you can be about what you want, the better. "There are so many more choices today, particularly with regard to flexibility and the potential for capital growth, but all these decisions need to be carefully planned," says Simon Smallcombe, head of guaranteed distribution for AXA UK.
You should also try to establish how long you want the income to last, how much income you need and your state of health, as the last option can impact on the length of time, the products and the form of income that will be best. Rather than just deciding between an annuity and drawdown, you need to choose which of the various types of these you want.
You can get conventional and guaranteed drawdown, so if you want some security in income you are not confined to an annuity. As well as a guaranteed income, guaranteed drawdown means that when you die the remainder of your pot passes to your heirs rather than to an insurance company. However, guaranteed drawdown is a costly option that can be as expensive as 1 per cent a year and eats away at your savings over time. With conventional drawdown, however, you need to ensure it will provide you with enough income for the rest of your life.
There are several types of annuity and which you choose can make a real difference to your income. For example, if you are in ill health or a smoker you can qualify for a higher level of income. Annuities available include conventional, enhanced (read more on this) guaranteed, escalating (for example with inflation) or fixed term (read more on fixed-term annuities and retirement options)
A need for advice
Even if you have never used a financial adviser, in the case of retirement planning it is really worth your while, not least to help you choose between the many options. "The planning for this is extremely complex and requires a detailed analysis, in particular when you first get advice," says Minesh Patel, managing director of IFA EA Financial Solutions. "You need a projection of what income you need depending on when you want to retire. Retirement planning is about combining all your sources income, not just pensions. You should also not forget the possible need for care, and how you will leave and divide your estate."
This can involve complex tax planning. If you are wealthier, preserving what you have, and than growing your pot might be better.
Even if you have not started planning early, it is never too late to start. With retirement age rising, even if you save between your early 50s and retirement, what you build up over, for example, 15 years could make a substantial difference to your final pot.
If you have not used your pension allowance in the past three years, you can carry this forward to the current year and are entitled to £50,000 for each year. "You can also invest up to £11,280 into an individual savings account (Isa), which has some of the tax advantages of a pension and does not incur tax when you withdraw from it," adds Kim Barrett, chartered IFA at Barretts Financial Solutions.
If you are in a couple, it can make sense to divide the assets between the two and draw from each so the person with most or all doesn't incur a higher tax rate.
If you are not in a position to sell your home or don't want to, you could use equity release, but this is expensive and inflexible, cautions Mr Laird.
