5 top financial mistakes retirees make
Retirement ought to be the stage of life for relaxing, socialising and taking part in activities you were too busy for during your working life. However, if you’re not in a comfortable financial situation throughout retirement, there’s a risk that it could become a stressful and uncomfortable chapter. If you’re looking forward to retirement in the near future, be sure to read up on these 5 common financial mistakes retirees make so that you can avoid them when planning for your future.
1. Failing to budget properly
It’s common for new retirees to burn through their money quickly within the first couple of years of their retirement. Sometimes this is because they took some or all their pension pot as a lump sum instead of an annuity, and they spent it on large purchases rather than saving it for use over the rest of their lifetime. In other cases, it’s down to poor budgeting. To make pension pots last, it is sometimes necessary to cut down on regular outgoings and live a little more frugally. When retirees don’t do this, they can wind up overspending in their first couple of years and being left with an even tighter budget later down the line.
2. Taking advice from family and friends
Although we often ask family and friends for advice when making big decisions, when it comes to financial matters it’s vital that you seek expert, impartial advice. Family members and friends may inadvertently give you misinformation, or they may pressure you into making decisions that benefit them and are not in your best interests. You could hire an independent financial advisor who specialises in pensions and retirement. Alternatively, you can get free advice from Pension Wise, which is part of the government’s MoneyHelper service. Anyone over the age of 50 can get a free appointment with a Pension Wise advisor.
be sure to also seek expert, impartial advice.
3. Collecting their pension too early
The age at which you can begin collecting your pension depends on the type of pension it is and the specific terms of the pension. Defined contribution pensions can often be collected from the age of 55, while defined benefit pensions can be collected from 60 or 65. The earlier you begin taking the pension, the more careful you have to be about the pot running low. Some people begin collecting their pension before they actually retire from work so that they can cut down their hours and transition to full retirement over several years. Make sure you don’t start drawing it too soon as you could be left with too little, long after you’ve retired.
4. Failing to shop around for an annuity
An annuity is a guaranteed regular income that funds your retirement. You can use your total pension pot to buy annuities. Many people are unaware that they’re not obliged to buy their annuities from the firm that provides their pension. Instead, you can shop around to find the best rates and terms in the same way you shop around for insurance policies, loans, or any other financial product. Once an annuity is set up it usually can’t be changed and some of them are designed to last the rest of your life. That’s why it’s so important to check different rates and learn about the different types of annuities so you can choose one that suits you. Keep in mind also that some annuities last as little as 5 or 10 years and when they end you can shop around again to find the best rate.
5. Paying too much tax
When you withdraw a pension pot as a lump sum, 75% of it is taxable. If you’re still working, or you worked for at least some of the same tax year as you withdraw the pension, it could push you into a higher band for income tax and lead to a hefty tax bill. This is a common mistake that retirees make because they’re unfamiliar with the taxation rates surrounding pensions. A much better option is to take the tax-free 25% of your pension initially, and then withdraw the taxable 75% in stages to spread it over multiple tax years. This can help you to take advantage of annual tax allowances and avoid paying too much tax.
Getting the most out of your pension and investments during retirement depends on good financial planning. The best way to avoid making crucial mistakes is to seek advice, spend plenty of time researching your options and put plans in place long before your retirement comes around.
