Most of us sporting a little more than a hint of grey hair tend to consider ourselves reasonably sensible people – the greying hair is a clear indication of our inherent wisdom – and, for the most part, our behaviour reflects this assumption.
We’re quite methodical, for instance, when sorting through household waste for recycling before putting it into the appropriate bin ready for collection. Then there’s our behaviour at periodic celebrations. Depending upon the event we’re observing, a landmark birthday, for example, we generally know when we’ve had enough to drink and (usually) decline the offer to join revellers on the dancefloor, even though we believe, deep-down, that we remain capable of ‘throwing a few shapes. Our age-given wisdom is further evidenced when we’re behind the wheel of a car because we pride ourselves on remaining relatively calm when some idiot swerves recklessly across the road without indicating, causing us to brake suddenly.
And, of course, when it comes to pensions, we do everything by the book. Except we don’t.
Millions of people save regularly during their working lives, usually when there are more attractive-looking alternative uses for their money: a short holiday, a weekend break, or several other forms of impulse purchasing. We reject these alternatives because while it’s rarely easy, we do so in order to enjoy the fruits of our sensible behaviour during a happy and (hopefully) prolonged retirement.
Nevertheless, just as they’re within sight of the figurative finishing line, preparing to clock off from work for the final time, there’s a sizeable body of evidence which suggests that a large number of folks do something completely out of character, taking a ‘left field’ financial decision capable of compromising their future. These decisions include surprising displays of financial inertia; withdrawing too much from their pension pots, or, in extreme cases, blowing the lot.
Fortunately, these mistakes are easy to avoid. Take pension drawdown.
The majority of people reaching retirement age prefer to draw a regular income from their pension pot (hence ‘drawdown’), but far too many do so without shopping around to ensure they secure a good deal. Not just a short-term one either: the average pension pot for a 66-year old man is a shade under £150,000, a sum which should last him for the rest of his life.
Despite this reasonable assumption, it’s incredible that we’ll spend hours researching, say, travel options for a long weekend break in France, nowadays likely to cost an arm and a leg, but when it comes to pensions, worth significantly more than the cost of an overpriced hotel in Nice for four nights, we’re happy to stick with the company that managed our savings for years, irrespective of how competent that management has been.
In other words, financial inertia could mean people are often paying more for the privilege of accessing their own money, or missing out on a wider range of drawdown options.
Then there’s the folks who are yet to retire who imagine it would be a terrific idea to draw the 25% tax-free allowance from their pension pot, which everyone aged 55* and over is currently entitled to do, although Chancellor Rachel Reeves may have something to say about that in the very near future. Problem is: they often get greedy and take just a ‘little more’. Unfortunately, this ‘little more’ could potentially push them into a higher rate tax bracket (because they’re still earning a salary), thus ensuring that their pension savings get hit with a 40% (or higher) income tax charge.
The message in both above instances is: look before you leap. Yet there’s one particular action, likely to tempt more people than they would admit, which can be disastrous.
Most retirees will rely upon their pension pot up until the point at which they shuffle off this mortal coil, especially as the current weekly maximum state pension of £230.25 could hardly be called a King’s ransom. It’s important, therefore, to keep an eye on it, making sure it lasts. That’s the sensible things to do, isn’t it?
Of course it is, but try telling that to people who can’t wait to get their hands on every penny and proceed to blow the lot. Believe me, it happens more frequently than you would imagine.
Admittedly, we tend to spend more money during our early retirement years, ostensibly because we’re still physically capable of travelling the world, hiking across the Pyrenees, or spending time sailing around the beautiful Greek islands. Nevertheless, this doesn’t explain how previously ‘careful’ types end up draining their pension pot, often on fripperies, within a few years of retiring.
Little wonder that over the past decade, there has been a sharp increase in the number of people using equity release to supplement their state and private pensions before any problems arise by tapping into the ‘hidden’ property wealth it has taken a lifetime to accumulate.
Broadly speaking, the level of equity that can be withdrawn from the family home using equity release upto 58% of the property's value dependent on age. The exact percentage is determined by a combination of factors such as the property’s value, their health and the youngest homeowner's age. For greater accuracy, by using an equity release calculator, a healthy 55-year-old homeowner might be able to release up to 24% of their property’s value, whereas a 75-year-old could release up to 48% of their home’s open market value. These figures increase further should there be any history of poor health to disclose.
Not surprisingly, the equity release market has grown steadily, thanks to the ever-widening range of available products and an equally impressive surge in awareness among people heading towards retirement, coupled with those who have already finished with full-time work. The Equity Release Council reports that the market grew by a staggering 450% between 2013 to 2023.
It follows that people who are ‘guilty of financial inertia, or who may have spent a little too much (or the whole pot) when they initially retired have an alternative, mainstream option which enables them to fill their pension void by releasing substantial wealth from their homes.
The equity release process is as straight forward as applying for a mortgage; the funds released are tax-free, there are no affordability or income verification requirements and beneficiaries may do as they please (within reason) with the money. If they’ve taken too much from their pension pot, they may wish to consider this before heading off on another spending spree.
Equity Release isn’t for everyone, hence seeking professional advice before taking the next step is heartily recommended. Being a sensible person, you knew that.
*The age at which people may access their 25% tax-free pension payment will rise to 57 in April 2028.
