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Financial adviser’s top 3 retirement income mistakes to avoid

Bradley Clark, HL Financial Adviser, discusses the three mistakes he often sees made in retirement, and how you can avoid them.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Everyone has an idea of what their dream retirement looks like. But getting there takes years of hard work and careful planning.

We look at some of the more common retirement mistakes, and how you can make sure they don’t cost you the retirement you want. Pension and tax rules change and any benefits will depend on personal circumstances.

Although this article can provide you with helpful tips, it isn’t personal advice. If you’re not sure if something is right for you, ask for financial advice.

Not having a retirement budget in place

A retirement budget should form the backbone of your retirement plan. It doesn’t have to be overly complicated, but it should be well thought out.

You can do this in two steps.

The first is to nail down what your essential, fixed expenses are going to be. Things like household bills, car and council tax, food, insurance and even medical expenses. You’ll get an idea of how much income you’ll need every month to cover these essential expenditures.

The second, is to consider your ad-hoc expenses like holidays, meals out, club memberships and even spoiling the grandkids. This is especially important if you plan on being more active in the earlier years of retirement when these costs might be higher.

When and how to access private pensions, or what a suitable investment strategy looks like, are much easier to plan for with a budget in place.

Not having a secure income in retirement

Once you know how much your essential expenditure will be, it’s always best to have these covered by secure sources of income in retirement.

A secure source of income is one that’s guaranteed and will pay you an income until you die, or beyond as it might be able to be passed onto loved ones. The State Pension, an annuity or a final salary pension are all sources of secure income. These are different to pensions held in drawdown, since your pension stays invested. That means your income could fall or even stop completely if your investments don’t do as well as you hoped.

Unsecured income on the other hand is from sources that aren’t guaranteed, like drawdown, rental income, investment income or bank deposit interest. The danger with these is that they could drop unexpectedly or disappear entirely.

If you’re thinking of using your State Pension to cover your fixed expenses, you can check how much you’ll receive and when it will begin with a State Pension Forecast.

If you’re an active or a deferred member of a final salary pension scheme, including public sector schemes like the NHS or Teachers’ Pension, you can request an income projection from the scheme administrators. Knowing this will help you build out your retirement plan and see whether your secure sources of income will be able to cover your essential expenses in retirement.

When it comes to annuities, you don’t need to use your whole pension to buy one. You could buy one to cover your expenses for the rest of your life. Or you can use a small amount to make up for any shortfalls from other sources of secure income.

You could even qualify for an enhanced annuity. If you’re a smoker, you drink or have an underlying health condition like diabetes or high blood pressure, you’re more likely qualify. But keep in mind, once set up, an annuity can’t usually be changed – so it’s important to consider your options carefully.

What you do with your pension is an important decision. You should understand all your options and make sure the option you choose is right for your circumstances. Get free guidance from Pension Wise about your retirement options and, if you’re still unsure what to do, get personal advice.

Not knowing how much risk to take

Leaving all your pension in drawdown can have its setbacks. You could run out of money if you take too much income too soon, or your investments fluctuate more than you planned for. Both of these potential pitfalls should be taken into account when building a retirement plan.

In drawdown, your pension is just an extension of your investment strategy. And to generate any income at all in retirement, there’s an element of risk involved. This is because the funds left in drawdown isn’t guaranteed.

We see lots of retirees taking on more risk in the lead up to retirement. But then putting the brakes on and staying in lower risk portfolios once they start taking an income from their pensions.

It can be tempting to reduce how much risk you’re taking in drawdown to minimise any ups and downs in the market. But this can be counterproductive as risk can also be an opportunity.

Being overly cautious with your drawdown investments can be a mistake. Clients might think that once they’re in retirement, they can’t make investment decisions or take on any more risk. But this can also lead to your drawdown pot running out, as it’s not making the most of the investments available to you.

If you retire at 65, you can normally expect to live for another 20-22 years on average. That’s still a long investment timeframe and means you can potentially take on more risk with part of your pension than you might have first thought.

Risk also doesn’t have to be all or nothing. Building a diverse portfolio of investments that span a variety of different types of investments, geographies, markets and sectors can help.

The important thing is finding the right balance between taking enough risk to achieve your goals, so your pension pot lasts, and not taking on more risk than you’re comfortable with.

Find out more about risk

Getting help with your retirement income

You don’t need to overhaul your retirement plans if you’re not sure if you’re making these three common mistakes or not.

Sometimes, it’s simple tweaks that can make the most difference.

But it can be difficult to fine tune your retirement income, your plans, or even adjust your investments if you’re not sure how they fit into your current or future lifestyle goals.

You also don’t need to do it all yourself. You might find that speaking to an adviser about your retirement could help you to meet your goals. Or if you’re not sure whether your retirement income will last, an adviser can help you to put a plan in place. They’ll understand where you are now, where you want to be, and how to get there.

Discover retirement advice with HL

Financial advice from HL

If you’d like to speak to an expert, our advisory helpdesk is the first step.

They won’t give you personalised advice themselves, but they’ll help make sure advice is right for you and that you’re comfortable with the charges involved.

If you’re happy to proceed, they’ll put you in touch with an adviser within two working days.

Book your call and talk to us about taking advice today.

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Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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