Asset Rich – Cash Poor
It’s a very traditional thing in Britain to own your own house, after all an Englishman’s home is his Castle. People often refer to their own homes as an investment, it’s only an investment if you are personally going to see a return.
All too often people spend their lives paying off their huge mortgage at the sacrifice of their pension savings. A large house, even though paid off in retirement will attract large gas and electric bills together with higher council tax.
Without a sufficient pension income to cover the household bills, retires can be faced with two choices.
Downsize or Release Equity
Not Changing Spending Habits
There’s often a big difference in income between pre and post retirement. Working for many years you may be used to going out for dinner every week and having 5 holidays a year. Adapting to a change in lifestyle and habits is sometime a culture shock. For those that don’t change, there is a nasty surprise when the money runs out and it’s too late.
Complete a budget planner for pre and post retirement to see what your expenditure is and needs to be. Think about what you can cut back on but also take into consideration future potential health care costs.
Taking your eye off your investments
As we move through our lives we generally become more risk averse. The same should be true to our investment portfolios. With the new pension freedoms meaning more people are staying invested instead or buying an annuity, ensuring your portfolio is invested sensibly is critical.
Complete a risk profiling exercise by yourself or with the help of a financial adviser. Analyse the results and make sure your portfolio mirrors your views on investment risk.
Spending tax-free cash too early
Many people seem to treat the 25% tax free cash allowance as a bonus. It’s spent on cars, holidays, home improvements and other such excesses. Just because there isn’t any tax to pay on it, it doesn’t mean it’s to be used on luxury items rather than living expenses.
The tax free cash portion of a pension should still be treated as an income and budgeted wisely. It’s often a good idea to invest it in deposit accounts and drip feed it back as annual income.
Failing for a scam
We’ve all read about the scams people fall for in newspapers. Unfortunately, there are some quite persistent and unscrupulous people out there who taken pensioners. The pension reforms have created new opportunities for criminals who try to convince people to hand over their pensions.
Withdrawing all the pension as a lump sum
Until April 2015, retirees had to buy an annuity or take pension drawdown with an annual income cap. Now, the full pension pot can be withdrawn as a lump sum.
A mistake people have commonly made since the reforms in not to consider the tax implications of doing this. Any income taken, outside of your tax free cash, is taxable. Therefore, large portions of a pension can be taxed at 40% or even 45%.
Use this calculator to understand your tax position.
Providing for adult children
A pension fund is there to replace the income lost when you finish working. It’s your savings pot to last you through your retirement years. Once it’s gone it’s gone. Care should be taken before deciding to donate a large proportion of this to your children for a house, wedding etc.
As we are all living longer it’s imperative we are conservative with how we spend this, especially in the early years. Planning is key. Estimate how much income you need per year and how long you are going to live based on national statistics. Although it’s not an accurate science it’s about planning rather than hoping everything will work out.
Children have become more of a burden now that they ever were financially. The baby boom generation have been the wealthiest ever, and probably ever will be. There isn’t anything wrong with helping your children out, just not at the expense of your financial well-being. Their time will come, as yours may have, through inheritance.
Not staying active
A large pension fund isn’t any use without your health. Many people retire from work but also from exercise which can lead to an unplanned shortening of life. There are many activates to keep a health heart aimed at the older generation.
Explore some of these.
Not keeping your mind active
One of the biggest fears we all have is to deal with alzheimer’s, either ourselves or in our loved ones. Keeping the mind active after you stop working is a good way to prevent the onset of alzheimer’s. Think of your mind as you do your body. If you suddenly became a couch potato after being active for 40 years, your body and heart would quickly deteriorate. The same is true with your brain.
It’s never too late to learn something new. Find a local course and keep your brain active.
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