An Institute for Fiscal Studies (IFS)¹ report in April 2023 said that many UK individuals are not saving enough for retirement and are increasingly finding challenges in managing their money – including the risks – effectively.
While the pension freedoms legislation (introduced in 2015) was designed to give people more control over their money it also increased the complexity. This makes forming good habits more difficult and easier to neglect some of the central pillars of investing well – so it’s good to be aware of the following.
1. Don’t ignore the stock market
Investing in the stock market carries a risk – and sometimes these risks are prominently displayed. When markets slump heavily it often makes the evening news. Yet it pays to overcome your concerns as we show here and hold your nerve when the mood is uncertain, or even fraught. Investing in equities (often through a fund) is generally the most reliable way to grow returns over the long term.
2. Make sure you are well diversified
Remember – stocks on their own are not enough. You may have been drawn to a handful of companies over the years, perhaps working for a few and acquiring shares from them. But a random assortment such as this doesn’t mean you are appropriately diversified – especially if they are all in one sector and that sector hits a losing streak (eg, large tech firms last year, financial stocks this year).
It’s better to have a mix of assets (including stocks, bonds and potentially commodities, property), with geographical variation, and your investments should be attuned to the level of risk you can afford to take and are comfortable taking. It's worth noting, too, that a previously designed portfolio – which may have been suitable at the time – may not be fit for purpose in a more challenging inflation and investment environment.
3. Don’t overpay in fees
Lower fees are crucial to help you build up a bigger retirement pot, but also to help this pot last for as long as possible. Stopping working doesn’t mean you stop investing. We frequently communicate about the accumulative power of paying just 1% less in fees, but making a comparative saving is just as valuable in retirement itself.
The example highlighted in this article shows how you could have 25% more of an income in retirement – £35,000 vs £28,000 every year – for just a 1% per annum cost saving in fees.
4. Use tax wrappers effectively
You should naturally invest through tax wrappers, such as ISAs and pensions, to reap the benefits of paying less tax and therefore growing your investments more efficiently. You should also keep up to date with any changes to tax allowances to ensure you are maximising your potential wealth.
In the 2023 Budget, for example, the ISA annual limit was unchanged at £20,000 but the pension annual allowance rose to £60,000. Meanwhile, the pension lifetime allowance (LTA) was scrapped, allowing you to grow a much larger pension without penalty.
It is worth scrutinising your assets closely to see how they can maximise your retirement pot using the various allowances – and how you can potentially pass on more to loved ones.
5. Optimise your withdrawal strategy
Amassing a reasonable pot is one thing, but how you access the funds you have accrued is also crucial. And it can be tricky, with the IFS stating that: “Even for the most numerate the decisions on how to draw on their pension wealth through their retirement are difficult.”
So it usually makes sense to prioritise the withdrawal of some assets over others – such as first taking money from a pension while an ISA continues to stay invested. The precise structure of withdrawals is quite an individual consideration, so some tailored advice could be ideal to help you optimise your situation.
Get in touch whenever it suits you if you would like to talk through your options.
6. Plan for living longer than expected
According to the Office for National Statistics² girls born in the UK in 2020 are expected on average to live to over 90 (87 years for boys). This increased life expectancy may have a dramatic impact on how long you may be retired, and how much money you might need.
Consider, therefore, that you may need to save more for the future – to cover anticipated expenses but also to pay for the extra costs of aging such as medical bills and perhaps care home fees.
Other factors will no doubt affect your retirement outcome (which may vary greatly depending on your circumstances) such as overspending and suffering from ill health. But by addressing these points above you could go a long way towards securing a better retirement.
And to help you manage your money better in the meantime, we set up the free MyNetwealth service so you can track all your investments – from multiple providers – in one place. You can plan more effectively for your financial future, gain detailed insights into how to meet your long-term goals and talk to our advisers who are on hand to help.
Please remember that when investing your capital is at risk.
Netwealth offers advice restricted to our services and does not provide independent advice across the market. We do not offer advice in relation to tax compliance, personal recommendations with regards to insurance and protection, or advise upon the transfer of defined benefit pensions.