From April 2015 when the then Chancellor George Osborne changed the rules and brought in pension freedoms, people have suddenly switched from buying an annuity to flexible drawdowns, where they can take out what they want when they want.
Now the FCA doesn’t have a problem with this, but they do have a problem with education more than anything else. They reckon that people are just walking into a nightmare, as there could very well be a problem at some time in the future when they will run out of pension money.
What on earth do these people do then, apart from telling a tale of woe? Pensions, as the FCA see it, are for when you retire, and if you take out a lot of money before you retire, then you won’t have it later. You can only spend it once after all!
If you run out of pension money in retirement – what are you going to live off? The State pension is certainly not enough for a comfortable life-style. How long are you going to live? Have you taken into account housing costs? What about care costs?
What we attempt to do at MAP is create a simple spreadsheet that shows your pension fund through the years to come, taking into account modest growth and withdrawals. Based on this information, we give a best effort at telling you how many years it might last. We only ever use low rates of growth to be pessimistic – 3% for cautious investors, 5% for middle risk investors and 7% for high risk investors – and we tend to work on an average of 6% withdrawals per year. So if you are a cautious investor, you can expect your fund to go down by about 3% per year, and therefore we need to look at longevity.
What we do in these spreadsheets is put in an estimate based on the information we have of how many years we think you have left to make your pension last. Having this kind of information is priceless to our clients and helps them to plan things out a bit better than they were before.
So, if you need some help in planning your retirement, please ask us for a forecast tailored for you. If you would like to discuss any aspect of retirement planning with Money Advice & Planning Ltd, please contact us today on 0345 241 1808 or e-mail us at firstname.lastname@example.org.
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