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BLOG: The ‘retirement smile’ and the cost of being nil-advised

Paloma Kubiak
Written By:
Paloma Kubiak

Preparing for retirement can often feel overwhelming. From working out how to make your money last or beat inflation, to the tax implications and complexities of estate planning, there is a lot to get to grips with.

Nearly half (45%) of those aged over 55 have never used the services of a professional adviser, with more than a third (34%) saying they would turn to the Government website to find out more information about saving for retirement.

A fifth said they would rely on the advice of family and friends, according to recent research by abrdn in association with The Wisdom Council.

Understandably, seeking financial advice might not seem like a viable option for some, but there is a misconception that a financial adviser is only for the wealthy. An adviser can not only help you ensure your money is working as hard as possible, but they’ll also help you create a plan that is tailored to you.

So, for those in the process of thinking about their retirement plans and not sure on whether they need to seek advice, here are six common mistakes people risk making when not seeking professional help – together with tips on how to avoid them.

1) Underestimating how much money you’ll need in retirement

With retirement lasting 30 years or more, many pension pots may have to last longer than expected. Plus, with high inflation, life in retirement is quickly becoming more expensive by the day. The Pensions and Lifetime Savings Association (PLSA) recently revealed that rising prices have added almost 20% to the “minimum” cost of retirement, with a recommended minimum retirement income increasing from £10,900 to £12,800 according to its latest Retirement Living Standards.

It’s worth noting that the “minimum” retirement only covers basic costs like housing and food, leaving no money for more luxury items like a car. A “moderate” retirement income sits at £23,300 (up 12%), which is a large jump from the “minimum” income, giving a little more flexibility and money for a holiday for example.

Meanwhile the PLSA says a “comfortable” retirement income is £37,300 (up 11%) which allows for even more luxuries like regular beauty treatments.

This rise highlights the need for forward planning. Everyone’s retirement lifestyle will be different, but you need to ensure you have a clear understanding of how much you plan to spend each year throughout retirement to plan adequately.

When you’ve worked this out, you’ll need to ensure your savings will support this alongside the State Pension. If you’re unsure where to start, a financial adviser will be able to help you map out a plan that is best for your personal situation.

2) Assuming spending will fall during retirement

A common and often false assumption that still remains today is that spending goes down in the later years of retirement, when in fact it can be the total opposite. From later life living, to medical and care bills, retirees could risk being caught out if they fail to map out their later life spending adequately.

We think retirement spending should be thought of as a ‘retirement smile’ – rather than being linear – ensuring a healthy sum is put aside for any potential costs down the line so there are no nasty surprises if they do arise.

Current residential care costs an average of £681 per week, which could cost you more than £35,000 per year and put quite a dent in your retirement savings if you’re not prepared.

3) Not being savvy with tax planning

A good financial plan will consider how you can make your money work as hard as possible to maximise your returns. When a new tax year starts in April, there are a set of annual allowances that come with it which should not be ignored.

Following the latest Spring Budget, you can now contribute up to £60,000 to your pension before reaching your annual allowance. This means the Government pays tax relief on your pension contributions so you’ll be paying less tax on your earnings than if you chose an ISA, for example, as the tax limit for this is only £20,000, so it’s worth making the most of the pension allowance, particularly in the lead up to retirement.

When it comes to withdrawing from your pension, it’s wise to think about how you can make the most of your tax free allowance. You’re able to take 25% of your pension pot tax free, which you could withdraw in one go.

However, by letting your pension pot continue to grow in value, and regularly taking smaller amounts over time, you might be able to get more than what you would have done from one initial tax-free pay out.

Capital Gains Tax – or the amount of tax-free profit you can make from selling items of value or property that is not your primary home – is also one to consider using in the build up to retirement. For the 2023/24 tax year, you have £6,000 allowance and any CGT will be dependent on your income tax band.

4) Not understanding which assets to access, and when

Many people will go into retirement with several assets, whether that’s your pension pot, an ISA, other investments or a rental property. While these are all good to have, knowing which one to take income from – and when – in retirement can be tricky.

It may be wiser for your personal circumstances, for example, to leave a pension invested to give it a greater chance of continuing to grow in value, and rely on rental income and any state pension you may receive first, for example. Everyone’s circumstances will be different, and it will be important to spend the time understanding what different combinations of assets could deliver for you so you can determine the best possible strategy.

5) Not thinking ahead on your wealth planning

While it’s not the most enjoyable topic to tackle, considering what happens to your finances after you pass away is important, particularly so you can ensure you are minimising the tax your loved ones might need to pay.

Inheritance tax is the tax on your estate – including property, possessions and money – that’s to be paid after you’ve passed away at a rate of 40% on any sum above £325,000. It can be a tricky subject to get to grips with, so it’s worth considering financial advice if you need a helping hand.

Anything under £325,000 – otherwise known as the nil rate band – isn’t subject to tax. If assets are being passed onto a spouse, the nil rate band could be higher. Couples are legally able to pass on up to £650,000 tax free, while if property is involved, this can be increased to as much as £1m.

Giving gifts while you’re still alive is a way to reduce future inheritance tax. There is an annual allowance of £3,000 which lets Brits gift either a single recipient or multiple people up to this amount each year without it being taxed. However, if gifts are given within seven years of your passing, your gifts will be subject to tax.

6) Forgetting old pension pots

If you’ve worked at several companies, it’s likely you’ll have different workplace pension pots which can be hard to keep track of, or may have even been forgotten about.

Combining them together – also known as pension consolidation – into one plan could help to ensure nothing gets forgotten. To track them down, all you need to know is the name of your employer or pension provider.

But if you don’t have this information, you can use the Government’s online Pension Tracing Service. Once you’ve tracked down your different pots, you might consider speaking to a financial adviser to work out how best to invest the sum.

Colin Dyer is a financial planning expert at abrdn