3 key reasons why your DIY retirement plan might not give you enough to last a lifetime

21 June 2024

Doing it yourself can be a cost-effective way to redecorate your home or spruce up your garden. However, taking a DIY approach to important financial tasks like retirement planning is decidedly riskier.

As you approach the end of your career, there are many factors to consider, so it could be easy to make costly mistakes. Indeed, FTAdviser reports that only 39% of retirees who haven’t sought financial advice are living the retirement lifestyle they want.

Despite this, a worrying 79% of over-55s have retired without financial advice.

If you’re considering a do-it-yourself approach, read on to discover three risks of DIY retirement planning and how a financial planner could help you avoid them.

1. You could pay more tax than necessary

A recent study by Standard Life found that 42% of retirees wish they’d sought advice or guidance when planning for retirement.

If you don’t seek help, one regret you could encounter is paying more in tax than necessary, which could weaken your financial stability at this important stage in your life.

Paying attention to tax could be especially important with regards to your pension. Since 2015, pension holders have been able to withdraw from their defined contribution (DC) pension in several ways, including:

• Purchasing an annuity
• Drawing a flexible income
• Withdrawing lump sums
• Taking your whole pot.

These options give you great flexibility, but depending on how you draw from your DC pension, you could end up paying more tax than necessary.

For example, withdrawing your whole pension as a lump sum could push you into the additional-rate (45%) Income Tax bracket, requiring you to pay a substantial bill and depleting your retirement fund.

It’s also important to remember that other forms of income could affect your tax liability when you retire, such as:

• Liquidating investments
• Income from property
• Your State Pension
• Your final salary pension(s).

Fortunately, by speaking to a financial planner before you retire, you could avoid these types of regrets. We can help limit your tax liability in retirement by developing an income strategy that supports your desired lifestyle.

We’ll take all of your income streams into account and help to ensure you have enough in retirement to pursue your goals without incurring a larger tax bill than necessary.

2. You may have unexpected costs

If you’ve ever undertaken an extensive project like landscaping your garden or fitting a bathroom, you’ll know that there are almost always unexpected costs.

What’s more, if you had tried to complete these projects yourself without professional help, you can imagine that errors and time constraints may have made the endeavour more expensive than you’d anticipated.

Big financial tasks like retirement planning can be very similar. Anticipating what you’ll need in your 60s, 70s, and 80s is challenging, and it’s easy to accidentally exclude some important costs from your plan.

As you can see from the below graph, FTAdviser reports that 13% of retirees face unexpected outgoings in retirement. Depending on the size of these unexpected costs, they could add an unnecessary level of risk to your financial stability later in life.

Source: FTAdviser

For example, the study revealed that 36% of retirees face unexpected health issues. If you were to experience this, it may require you to pay for professional care or treatment.

In addition, if you don’t factor the rising cost of living into your plans, you could deplete your savings more quickly than you’d anticipated, as 21% of retirees reported in the above graph.

This is where working with a professional to create a retirement plan could be so valuable. Financial planners have a wealth of experience and knowledge we can draw on to more accurately predict your retirement expenses.

Using cashflow modelling, we can forecast how your annual expenditure will likely change throughout your later life, factoring in costs you may not have considered and helping you understand how much you’ll need to live comfortably.

3. A longer life expectancy means your money may need to go further than you planned

Research from Canada Life found that a large proportion of both men and women underestimate their life expectancy. This may seem trivial, but it could have serious consequences if you’re planning for your retirement.

For example, according to the Office for National Statistics (ONS), the life expectancy of a 50-year-old man is 84, and a 50-year-old woman is expected to live until 87. However, if you only think you’ll live to 80, you may deplete your savings too quickly, leaving you without enough money to support your needs in your later years.

As such, drawing a sustainable income that will support you no matter how long you live is essential and could be easier with the help of a financial planner.

We can help you map out your income so you’re covered for the rest of your life, even if you live a very long, full life.

Additionally, we can help you plan for the potential expense of later-life care, and devise strategies to mitigate your Inheritance Tax (IHT) liability.

Get in touch

While FTAdviser reportsthat 11% of people found their experience of retirement more difficult than expected, the support of a financial planner could make things much smoother.

Find out how we can help you by emailing info@depledgeswm.com or calling 0161 8080200.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

The Financial Conduct Authority does not regulate tax advice or estate planning.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.