From April next year, you’ll have more freedom over the way you withdraw from your pension pot. Instead of being forced to buy an annuity, which provides a guaranteed income for the rest of your life, you’ll be able to withdraw as much or as little as you like.
In effect, you’ll be faced with three options when you reach retirement age:
- Withdraw all of your pension pot
- Leave the pot invested and withdraw funds as you need them
- Buy an annuity
Whichever choice you make, you’ll need to be aware of the complex tax rules and regulations around pension drawdown. Depending on your circumstances and what you need to live comfortably in retirement, you may find one option suits you best. Your financial adviser will be able to help you make the decision that’s right for you.
However near or far you are from retirement age, you’ll want to have enough money in your pension pot to provide you with the lifestyle you deserve after your working life is over. Thankfully, it’s never too soon – or too late – to make the most of pension saving.
The key challenges when saving over the long-term are to protect the value of your money from erosion by inflation, to grow your capital and to hold your nerve when the markets fluctuate.
Think about inflation
Inflation has the power to reduce the real-terms value of your money over time. For example, if the inflation rate is 2%, £1,000 held in cash would be worth only £980 after one year.
Currently the rate of inflation in the UK is 1.2%, down from 1.5% in August. This is a substantial decrease to the yearly high of 1.9% in June of this year.
The benefits of compound interest
When you’re saving for a long-term goal such as retirement, you can take advantage of compound interest. This is the process where the return you earn on your initial investment continues to grow as future returns are calculated on both your initial investment and any returns made since then.
With compound interest, your money has the potential to grow at an increasing rate. This means that, the earlier you start to save, the greater potential for higher returns you will have in later years.
Investing in a pension means that your capital and returns are linked to market performance. You are likely to find the value of your pension fluctuates over time. While the value may rise, it can also fall.
The challenge is to keep your money invested for the long-term. In times when the market is performing poorly, investors who withdraw their funds don’t get the benefits when the market recovers – it can pay to stay in the market.
If you do find yourself falling behind your goal or simply want to take advantage of buying opportunities when markets are low, you can use impulseSave® to top-up your savings from just £1 whenever and wherever you like online via your client site or through our range of mobile apps.
All of these challenges will influence the way you plan for your retirement. When you’re calculating the amount you will need to live comfortably, make sure you factor in both the rate of inflation and the benefits of compound interest. As you’re following your plan, stay focused on the long-term goal and you’ll give yourself the best chance of rising out any downturn in the market.
If you need to create a new retirement plan or want to review your existing plan in light of the April 2015 changes, contact your financial adviser by secure message through your client site.