Here’s an unsettling mortal thought: When do you think you are going to die?
It’s a question we generally seek to avoid, though thanks to recent changes in the pension market, it’s a question that’s taken on a new significance.
Decades ago, one retired at sixty five and, on average, drew a decade of pension entitlement before departing for the sweet hereafter.
In 2015, some of these certainties have gone. Not only are many of us taking early retirement, but equally as many are facing a future where they will have to work on for many years.
We have longer life expectancies than ever before and this means longer retirements to plan for.
As of March last year, and coming into effect from 6th April 2015, savers accessing their pensions will no longer be forced to purchase an annuity.
Annuities are insurance products that pension savers bought with the lump sum of their pension, which in turn guarantee them a monthly income for the rest of their lives.
Since this will be made non-compulsory, pensioners have been allowed to spend their lump sum in whatever way they see fit.
This new found freedom has both benefits and drawbacks. Greater flexibility in the way savers draw down their pensions means more choice for millions, but it also means that there is the potential for serious financial problems later on.
Let the saver beware
Pensioners with large sums of money to spend need to be wary of investments that sound too good to be true.
In addition to this, even if they are investing their in thoroughly reputable funds or buying property, it is essential that they work out exactly how far their savings will go.
Thinking of one’s own life expectancy, the amount of returns that the investment will yield, and the standard of living ideally one might like to enjoy are all crucial considerations.
Savers must also consider the potential rise in the cost of living as inflation is guaranteed to erode part of any savings in the long run.
Very few pensioners will make genuinely foolish decisions and blow their life savings on a Ferrari, but there might well be a significant number who seriously miscalculate how much they will need to live on and wind up with major financial problems later on.
Retirement is supposed to be a time in life where the hard work of the previous decades pays off and life can be enjoyed, but without a sound financial basis, this is impossible.
It is for this reason that pensioners who access their annuity free lump sums should seek some professional financial advice as a priority.
Financially planning a retirement is difficult, and for many of us, managing it alone is a complex and demanding process.
A PENSION IS A LONG TERM INVESTMENT THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN. YOUR EVENTUAL INCOME MAY DEPEND UPON THE SIZE OF THE FUND AT RETIREMENT, FUTURE INTEREST RATES AND TAX LEGISLATION.