For the British public, money power is on the increase with the improving economic climate and new freedoms around access to pension pots. As with all planning, careful decisions need to be made to ensure this new money power is put to good use.
Recent data from the Office for National Statistics showed that average earnings excluding bonuses had grown to 1.8 percent from a year earlier. With inflation as measured by the Consumer PriceIndex at 0.5 percent we are now seeing real wage growth for the first time since the financial crisis began.
The pension freedoms that come into effect in April will allow savers to still take a quarter of their pot tax-free, but rather than buying an annuity or being tied into current pension drawdown restrictions, subsequent withdrawals can be at any level, at any time and taxed at the individual’s marginal tax rate. This has led to the government’s prediction of a £2bn windfall of cash being released from pensions, but other predictions have reached as high as £6bn of money to be withdrawn.
One question remains as to what people decide to do with their extra spending power. Do they treat themselves to things they have put off buying, such as a luxury holiday or home improvements? Or do they save in the belief that the lower price at the petrol pumps is only a temporary relief? Or do they want to use the money from their pension to reinvest elsewhere for better returns or income?
The possibilities are expanding as pension providers begin to innovate products in the wake of annuities not being the default option for retirees. A recent Dispatches programme revealed that savers were already being approached by unscrupulous outfits attempting to persuade them to invest their pensions cash into things as extreme as foreign parking bays and self-storage units.
The importance of evaluating your own financial planning skills are apparent here, as not only will unscrupulous or inappropriate investment schemes be promoted, but also current pension schemes will need to be reviewed to see if they apply the new rules, while retirement income needs will have to be assessed taking into account any planned withdrawals.
There is a proliferation of information available at everyone’s fingertips nowadays but even an extensive study of many text books and legislation is unlikely to be an adequate substitute for qualified advice. A concept relevant in human psychology is something called the Dunning–Kruger effect, a cognitive bias when someone mistakenly rates their ability much higher than is actually the case whilst, at the same time, failing to recognise genuine skill in others. As Warren Buffet once famously remarked ‘risk comes from not knowing what you’re doing’ and in spite of all of the hype, what we know is that for many people, particularly those with a potential Inheritance Tax issue, taking full advantage of the new pensions freedoms could ultimately be extremely detrimental for many individuals and subsequent generations of their family.
The ability to acknowledge what you don’t know, or know well enough, is often the most important first step in improving your personal financial circumstances. The second step is to find someone who is willing and able to work with you to improve your investment risk focus and overall financial planning outcomes.
An Independent, Chartered Financial Planner, like Lowes Financial Management, who look across the entire product space for solutions that fit your individual circumstances and needs, can ensure that your money power is well invested, spent or saved.
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