All you need to know about planning your pension

It seemed tempting. But when she found out how much her pension pot was worth, it came as a shock.

For 25 years she'd paid in £30 a month. Her payout? Just £7,000.

"I was quite disappointed," she says, with deliberate understatement.

She took the money so she could visit her daughter in Australia, who was unwell.

But it has left her without the prospect of a personal pension when and if she ever retires - so she'll be reliant on a state pension. She doesn't even own her own home: she sold it to invest in her business, the York Healing Clinic.

"So I dare say I'll be working until I'm 90!" she says.

In one way, June doesn't mind that. She loves her work. But if she were to become debilitated by illness one day...

Her children once said they'd look after her, she jokes. "But we might have to have that conversation sooner rather than later."

June is more concerned about the way society is going than about her own personal finances - she worries about the cuts in benefits and in support for the ill and vulnerable.

But she admits she probably should start worrying more about her own future, too. The trouble is day to day life always takes over, she says. "Tomorrow will come, and whatever will happen, will happen."

June is not alone in being less prepared for retirement than she could be.

Almost 35 per cent of people questioned in a survey conducted for the Office for National Statistics (ONS) admitted they didn't feel they understood enough about pensions to make decisions about their retirement. And almost 60 per cent felt their retirement income wouldn't be enough for them to have the standard of living they hoped for.

A separate ONS survey, meanwhile, revealed worryingly low levels of 'financial capability' - ie the ability to manage personal finances. In Yorkshire and the Humber, households scored an average of just 2.3 on a scale of 0-10 when it came to 'planning ahead' - and a scarcely better 2.9 for 'staying informed'.

They are figures that don't surprise York financial adviser Andy Richardson, of Equinox Financial Planning.

"People's lack of knowledge is quite staggering," he says.

That ignorance may be more dangerous now than ever. Under the new Pension Reform Act, since April this year it has been possible for anyone aged 55 or more to withdraw the whole of the pension pot they have spent years building up, and instead of using it to buy an annuity - ie a guaranteed income for the remainder of their life - do what they want with it.

There may be a temptation to splash out your pension pot on a luxury cruise or a fast car. But whether your retirement is comfortable or a worry could depend on the decisions you make about your pension

On one level it is all about giving people the power to choose what to do with their pension pots - whether that's buying a Ferrari, taking a luxury holiday, or helping out the kids.

But there could be real consequences for the quality of your life in retirement if you make a rash decision, warns Age UK York. "There are so many things that could go wrong," says the charity's money and benefits adviser Gwen Rayner.

Her boss, Age UK York's deputy chief officer James Player, agrees. "On one level, the reforms are giving people the chance to spend their hard-earned money in the way they want, and that's fair enough," he says. "But it is also putting the onus and responsibility back on the individual, and there is a question over whether they have the financial capability to deal with that."

For Tony Lindsay, chief executive of the York Citizens' Advice Bureau, the most important thing is for people to get guidance or advice before they make any decisions about their pensions - whether that is free guidance from the Pension Wise scheme offered through the CAB, or advice you pay for from a professional adviser.

Andy Richardson agrees.

If you are nearing retirement age and make the wrong decision about your pension, it could affect the whole of the rest of your life, he says. And if you're about to retire, and get it wrong, it's a mistake you won't be able to put right...

The pros and cons of being able to do what you want with your pension pot

Under the new pension rules, people aged 55 or over have five basic options when deciding what to do with their pension pot, says Tom Adamski, a CAB employee who provides free pensions guidance under the Pension Wise scheme.
You can:
1. Leave your accumulated pension pot invested. If you are financially OK at the moment, this may be an option. Your pension pot may continue to grow, and you’ll pay no tax on it while it remains invested. But there is always a chance that your pot may lose value – because investments can go down as well as up.
2. Take out an annuity – a guaranteed income, usually for the remainder of your life. This is what the majority of people did up until the pension reforms. You can draw out 25 per cent of your pension pot tax free, and know how much you will have to live on thereafter. But the decision is irrevocable – once you’ve plumped for an annuity you can’t change your mind. And you have to make all the arrangements quite quickly – within six months of taking the tax-free lump sum.
3. Take a flexible income – ie ‘draw down’ from your pension pot as and when you need money. Again, you can take a 25 per cent lump sum as cash free of tax. But any further withdrawals you make will then count as income for tax purposes, warns Tom Adamski: and could even push you into a higher tax bracket, which could be costly.
You also have the problem that you may run out of money in retirement. And if that happens, because you have voluntarily spent the pension pot you accumulated, you could find that you are no longer eligible for certain means-tested benefits such as pension credits, council tax benefit and housing benefit, warns Age UK York.
4. Take your whole pension pot as cash, and spend it on whatever you want. Again, 25 per cent would be tax free, but you would pay tax on the remaining 75 per cent – and again, it could push you into a higher tax bracket.
The benefit is that you have real freedom and choice over what you do with your money, says Tom Adamski. The risk – again, as with option 3 above, you might run out of money.
5. A mix of the above, with associated benefits and risks.
Deciding which of the options is right for you isn’t easy: and it will depend on your personal circumstances, the size of your pension pot, and what you want or expect out of retired life.
One danger that both the CAB and Age UK warn about is that there will be plenty of people out there wanting to take advantage of you and your pension – by offering bogus or biased advice, pressuring you into making decisions that might not be in your long-term best interests, or out and out wanting to cheat you. “As you approach the age of 55, people are going to cold call you,” warns Tom Adamski.
That’s why proper advice or guidance is essential. Provided you meet certain eligibility criteria, you are entitled to a session of free pension guidance through the Pension Wise scheme offered locally by the CAB. Pension Wise caseworkers are in the York CAB offices at the city council’s West Offices HQ two days a week. To find out more, call 03444 111 444 or visit
yorkcab.org.uk
Alternatively, you can seek advice from a reputable professional financial adviser. It’s always worth speaking to more than one, to find someone you feel you can work with and build up a relationship with, says Andy Richardson.
If he had one word of advice to give to someone about investing their money wisely, it would always be to diversify, he says - to put you money in a range of products – including ISAs, equities and even property. Investments rise and fall: that’s the nature of the game, he says. So spread your investment. “Don’t put all your eggs in one basket.”
To find a financial adviser in your area, Andy recommends visiting unbiased.co.uk