Why ‘retire and take your pension’ is a broken concept

Published on September 19, 2019 by TFP Team Category: Financial planning & Retirement

The concept of “I’m going to retire and take my pension” is fundamentally broken. That’s the opinion of our financial planner, Dan. Keep reading to find out why…

Retirement and pensions, as they have been traditionally portrayed and are still thought about by many, are obsolete. No one should just ‘retire’ and no one should just ‘take’ their pension. To achieve financial independence with a pot of invested assets takes planning and discipline, but if done properly it can lead to the extraordinary!

The word retire is a middle French word that originated in 1525. The dictionary definition is:

  1. To withdraw, or go away or apart, to a place of privacy, shelter, or seclusion.

In addition, the word retirement is also middle French and originated a bit later in 1590. The dictionary definition is:

  1. The act of retiring, withdrawing, or leaving; the state of being retired.
  2. The act of retiring or of leaving one’s job, career, or occupation permanently, usually because of age

Now, I don’t know about you but none of the above sounds fun or very appealing!

However, this is what people used to do (and to a certain extent still do). I remember my grandad retiring in the early 1980s. One Friday he went to work and then on the Monday he sat in his chair all day and collected his State Pension. There he stayed until he passed away a few years later.

Retirement as it has traditionally been thought about has to be eradicated from our minds. Carl Richards of Behavior Gap puts it brilliantly when he says that: “When we get older, we should focus on doing more of the things we do like and doing less of the things we don’t”

Think about that for a moment. This doesn’t mean that we stop working or that we sit around all day wondering what to do with our time. It means that we should make choices that are free from money biases and that involve us retaining a purpose and doing more stuff that we love to do. If that includes it bringing in some income, then that’s a bonus. We call this ‘being financially independent’.

The dictionary definition of ‘independent’ is:

  1. Not influenced or controlled by others in matters of opinion, conduct, etc.
  2. Thinking or acting for oneself: an independent thinker.
  3. Not subject to another’s authority or jurisdiction; autonomous; free: an independent businessman.
  4. Not influenced by the thought or action of others: independent research.
  5. Not dependent; not depending or contingent upon something else for existence, operation, etc.

Now that sounds more like it, doesn’t it?

That brings me onto pensions. Again, this is a broken concept and one that, in my opinion, is much more confusing and entrenched than retirement.

To me a pension is something that provides you with a regular (probably inflation protected) level of income for the rest of your life. If you die, your widow(er) might be entitled to up to half of this amount. In order to get this income, you would hand over a pot of money to an insurance company, wave goodbye and hope you can outlive it to get your money back.

This all sounds very dull, and quite depressing. It means I have to live for quite a long time on a level of income that might or might not allow me to do much more than sit on my chair in front of the TV all day.

The new flexible pension rules and rise of the Defined Contribution pension scheme means that, in my opinion, a pension now needs to be viewed as an ‘invested long-term savings pot’ that you can use however you wish to provide you with the lifestyle that you desire.

No longer do you need to take a regular income (although you can if you want), no longer do you have to take a tax free lump sum at the outset (although you can if you want), and no longer do you have to give your pot of money over to an insurance company to provide you with an annuity (although you can if you want).

You now have complete freedom as to how, why, when and what you choose to spend your money on during your ‘retirement’. What a wonderful position to be in. Why would you want to have it any other way?

Don’t get me wrong, this new way of thinking creates some new and additional risks, but it also allows you to plan with purpose to live an extraordinary life.

Realising that you have independence, freedom and choice with a pot of money that will help you achieve some amazing things is a liberating experience. It is a journey that many, if not all, our clients go through.

With some foresight and REAL financial planning, just retiring, taking your pension and existing is not an option. Neither should you want it to be. Ensuring that you can continue to have a purpose and do more of the things you love is what we should all strive for when we reach the time of our ‘financial independence’. This is the foundation for an extraordinary retirement.

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