Savers now have almost limitless options when it comes to spending and investing their retirement pot.

Flexible rules mean from age 55 you can keep your fund invested, take a regular income, access ad hoc lump sums or secure a guaranteed income by purchasing an annuity from an insurance company. For many, a combination of these will be the most suitable approach.

Staying invested in retirement gives you the opportunity to grow your fund and, if you want to, pass it on tax efficiently to loved ones when you die. However, there are also numerous pitfalls to navigate
as you look to make the most of the freedom on offer.

Here are just a few of the common retirement mistakes you should avoid.

INVESTING ALL YOUR FUND IN CASH

According to the Financial Conduct Authority (FCA), the City regulator, around a third of retirement investors who don’t have an adviser are entirely invested in cash.

While this might be sensible if you are planning to withdraw money from your fund in the near future (and so want to avoid any stockmarket fluctuations), it is unlikely to be a sensible long-term strategy.

In fact, the FCA says over a 20 year period someone could increase their annual income by a third if they invested in a mix of assets rather than just cash. You should also remember that, with inflation currently running at 2.4%, any money sitting in cash is losing value in real terms.

OVERPAYING IN CHARGES

Small differences in the costs and charges you pay for investing your pension pot can make a big difference over the long-term. When it comes to taking an income, the FCA says the charges levied by providers range from 0.4% to 1.6%.

By switching from a higher cost provider to a lower cost provider, the regulator says you could increase your annual income by 13%. For an individual with a pot of £100,000 this would be an extra £650 per year.

This is one of the reasons why it’s critical you shop around before choosing both a provider and pension product.

TAKING TOO MUCH RISK WHEN MAKING BIG WITHDRAWALS

While taking too little risk in retirement could cost you dear (see ‘Investing all your fund in cash’), taking too much at the same time as making big withdrawals could spell disaster for your long-term plans.

Take someone who invested a £100,000 fund in the FTSE All Share, paying 1% in pension and administration charges. They withdraw £10,000 a year in income from their pot.

If they started taking an income in 2007 – just before the financial crisis hit – they would have withdrawn £100,000 by December 2017 but would only have £16,400 left in their fund.

If the same person started taking an income at the end of 2008 – at the beginning of the bull run – they would have taken £90,000 of income and still have a fund worth over £113,000.

While clearly circumstances can dictate retirement outcomes, it is important you take these into account when setting and reviewing your investment and withdrawal strategy.

Tom Selby, senior analyst, AJ Bell

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