Whether you’re a risk taker or cautious by nature, retirement is not the time to start gambling with your money.
However, that doesn’t mean you shouldn’t take any risks at all, as that may mean you miss out on investment growth which could provide your pension savings with a valuable boost.
When you retire, you’ll hopefully be leaving behind the daily grind of the nine-to-five, but it doesn’t necessarily mean it’ll be one long holiday for the rest of your life. Unless you’re lucky enough to have more money than you’re ever likely to need, you’ll have to squeeze the maximum income out of the money you do have, without taking on more risk than you feel comfortable with.
Here, we explain the various options available to you to help you ensure that your retirement savings last for as long as you need them to.
If you’re thinking about getting professional financial advice, you can find a local financial adviser on VouchedFor or Unbiased.
Alternatively, if you’re looking for somewhere to start, we’ve partnered with independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,500 reviews on VouchedFor, the review site for financial advisors.
The importance of having a cash buffer
Whatever your circumstances, when you retire you’ll need some money in an easy access account to pay for those unexpected expenses that tend to crop up from time to time (such as repairs to your car, holidays or maintenance for your home).
Many people opt to take the maximum of 25% of their pension as tax-free cash when they retire and to use some of this for emergency savings. By doing this you can:
- Pay less tax.
- Have the flexibility to decide whether to reinvest this money or put it in a savings account.
Depending on the size of your pension fund, you may decide to put some or all of your 25% tax-free cash lump sum into savings. There are some financial decisions that it’s fairly easy to make on your own, but it’s usually well worth seeking independent financial advice from someone who’s well qualified and who you feel comfortable with, if you’re looking at savings and investment options at retirement. An advisor can help you decide how much risk to take with our savings and recommend the best homes for your money.
Bear in mind that taking your tax-free cash lump sum shouldn’t be entered into lightly either. You might decide, for example, that you don’t want to take the full 25% now, or that you don’t want to take any money just yet as you’d rather leave your pension savings to benefit from potential investment growth for longer. Find out more in our article Should I take a tax-free lump sum from my pension? And What’s the best way to use my 25% pension tax-free cash?
Keeping your cash savings safe
It might be more convenient to keep all your money in one account, but it’s better to spread it around. When Northern Rock had to be bailed out by the government back in 2007 at the start of the financial crisis, it emerged that some people had hundreds of thousands of pounds in one account.
In broad terms, the Financial Services Compensation Scheme (FSCS) covers you if you have up to £85,000 of savings in one bank or building society, or in a group of banks that share the same banking licence. There’s more on how the compensation scheme works in our article Are my savings safe?
- Spread your cash so you keep below the £50,000 savings compensation limit.
- Understand how different parts of the savings compensation scheme work (for example, Post Office savings accounts are backed by the Bank of Ireland, so covered by the Irish deposit protection scheme).
National Savings & Investments savings products are 100% guaranteed with no upper limit and some accounts pay interest tax free, but the interest rates aren’t always particularly competitive and sometimes they’re quite low. You can find out more about NS&I in our guide National Savings & Investments products explained.
Making your money last
Perhaps the biggest risk any of us face in retirement is that we run out of money too soon.
If the money you’re living on once you retire is made up of your state pension and one or more private pensions, you’ll need to plan carefully so that your money lasts as long as you do.
This won’t usually be so much of an issue if you’ve used or are planning to use your pension savings to purchase an annuity or a guaranteed income for life, as you’ll receive your payments regularly until you die. If you’re in the fortunate position of getting more income from your annuity than you need to live on, you can put some aside to help cover increased costs that you may face as you get older. Learn more about how annuities in our article Annuities explained.
Whether you keep this money in cash, for example, in an ordinary savings account, a cash ISA, or you invest it is up to you. But when investing, you must make sure that you’re comfortable with the risks. When interest rates are low it may be tempting to put your money into a product that offers tempting returns, but you have to approach this as a sceptical consumer. Don’t sign up to anything you don’t understand, or because it’s performed well in the past. Take advice and ask the advisor to spell out (in writing) what the worst-case scenario could be.
The situation is less straightforward if you’ve chosen to leave your pension invested and to drawdown an income from it as and when you need it.
The biggest risk of pension drawdown is that you might end up taking too much money out of your pension savings too quickly. If you do this, or if your investments don’t perform as you’d hoped, you might find that after a few years you’re left with only the State Pension to fund your retirement.
It can be useful to use a pension drawdown calculator so you can see a forecast of the pension income you’re likely to get when you retire, based on the current value of your retirement savings. The consumer association Which? offers a specific drawdown calculator which can help you work out how long your pension pot might last based on the income you need, and other factors such as how much tax-free cash you want to take out, and where your savings are invested. Learn more in our guide How long will my pension last?
Remember that choosing pension drawdown or an annuity doesn’t have to be an either / or decision, and it’s possible to go for a combination of both. For example, some people choose to have an annuity to cover all their essential outgoings and then use drawdown so they can take income from the rest of their retirement savings as and when they need to.
If you’re thinking about getting professional financial advice, you can find a local financial adviser on VouchedFor or Unbiased.
Alternatively, if you’re looking for somewhere to start, we’ve partnered with independent advice firm Fidelius to offer Rest Less members a free initial consultation with a qualified financial advisor. There’s no obligation, however if the adviser feels you’d benefit from paid financial advice, they’ll talk you through how that works and the charges involved.
Fidelius are rated 4.7 out of 5 from over 1,500 reviews on VouchedFor, the review site for financial advisors.
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