Postpone retirement for a year to avoid pension rip off, experts warn

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The government has announced that it will introduce a cap on rip-off pension fees in March 2017. The announcement has led the experts to warn older people that it may mean they need to postpone retirement for a year, in order to avoid a pension fee rip off.

The cap

New rules from the FCA will limit the amount that companies will be allowed to charge people who want to take advantage of new pension freedoms - and withdraw cash from their pension. They have not set the cap just yet, but will confirm the details shortly.

FCA figures recently showed that although 83.6% of firms didn't impose exit fees on customers aged 55 and older - 700,000 people still faced exit fees of some sort. And while these charges amounted to less than £250 for 9.2% of people, they came to more than £1,000 for 2.6% of people (870,000). Meanwhile 62,000 people have faced penalties of 40% or more of their entire pension fund.

These aren't new fees brought in by the pension companies in order to stop people using pension freedoms, but are a legacy from past decades, when the fees were written into the contracts to stop people leaving early.

What should you do?

The axing of rip off 'exit fees' will mean some savers pay thousands of pounds less in fees, and the experts have suggested that if you plan to take advantage of pension freedoms to withdraw cash, it may mean it's worth staying in work until March 2017, so you can take advantage of the new cap.

Nathan Long, Head of Pension Research at Hargreaves Lansdown, says anyone set to retire before March 2017 and planning to use pension freedoms should get up-to-date statements and take stock. For a start, this will help you understand the effect of recent market movements on your pension pot - which may impact your decision as to whether or not to withdraw lump sums.

You also need understand the costs of exit. Long explains: "If you have an early exit penalty, work out when it naturally comes to an end. The FCA can cap charges, but looks unlikely to remove them entirely. Anyone who is very close to the point when they can take their pension without penalty may want to simply wait patiently."

If it makes sense to postpone taking your pension, he highlights: "Accessing pension plans does not necessarily go hand in hand with finishing work." He says there are plenty of options to consider: "Will you move part time, or access some of your pension whilst still working? Do you need to delay or change your investment strategy? You can then create a plan of which pensions you need to access and when, this can help to avoid using any plans whilst they have an early exit charge."

If in doubt, he adds, this may be the time you could benefit from taking advice. It comes at a cost, but retirement is often uncharted territory, and you may not know about all the potential options - let alone understand them - so it may pay to get some help.

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Dream retirement destinations
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Postpone retirement for a year to avoid pension rip off, experts warn

A study by MGM Advantage discovered that Portugal is the 10th most popular dream retirement destination among Brits.

You get the attractions of the sun, a more relaxed way of life, lower living costs and cheaper property. You can also benefit from pension arrangements that mean your pension rises with inflation.

And if you choose to, you can spend your time with the enormous expat population, feeling like you never left.

In the tradition of the Best Exotic Marigold Hotel, there’s a large number of people keen to move to India, partly in order to enjoy a much higher standard of living than they would be able to afford in the UK.

If course it’s important to consider that your state pension will not rise in line with inflation - so will halve in real terms during your retirement.

This part of Europe offers a great combination of some of the lowest living and housing costs on the continent, along with a more forgiving climate than the UK.

For that reason Bosnia and Herzegovina, Bulgaria, Croatia, Romania, Greece and Turkey are a big draw for retirees.

However, state pension provision varies across the region, so you will need to check whether retiring to these locations will mean your pension continues to rise in line with increases in the UK, or will be frozen when you move overseas.

Italy is a country of contrasts, so anyone planing a retirement there needs to think carefully about whether they want to call a bustling city home, or whether they would be happiest in the mountains or by the sea.

Housing tends to cost less than in the UK, and in some regions it's incredibly cheap. Living costs are also lower than in Britain, and your pension will rise in line with increases in the UK.

Canada is a big draw for British expats of all ages. This spectacular country is known for being welcoming to people from all over the world, and in many cases has no language barrier for Brits. The quality of life is high, and the cost of housing lower than in the UK.

However, you will need to factor in the fact that your UK state pension will be frozen on the day you leave, and you will need some health insurance if you want to replicate the sorts of things that are available for free on the NHS.

As with India, the Far East offers an exciting and dramatic change from life in the UK, with much lower costs, which can buy you a higher standard of living (although bear in mind your state pension will be frozen).

You will need to consider the cultural and practical differences associated with the move, but you will have the opportunity to live in one of the most exciting places in the world.

The weather, lifestyle, space, and lower cost of living means that British expats of all ages are keen to move to Australia.

Property can be a bit of a stumbling block in some areas, as prices have gone up so much. The currency is also strong, which has posed some issues for those who receive their income in pounds, and there’s the fact that the UK state pension will be frozen if you move. However, if you can overcome these things, then a new life in the sun awaits.

The US offers much more affordable housing, and in many respects a lower cost of living than in the UK.

It appeals to those who don’t want to live with a language barrier, but want more space, possibly more sun, and an American Dream of their own.

There are some important things to factor in before you move, such as the additional cost of healthcare, and the exchange rate. However, one bonus is that your state pension will rise at the same rate it does in the UK.

France is close to home, and yet offers cheaper accommodation than the UK, a lower cost of living, and in many regions there’s better weather too.

Your pension will rise at the same rate it would in the UK, and at any time friends and family are just a short boat or plane ride away. It’s no wonder France is the second most popular dream destination for retirees.

It will come as little surprise that Spain tops the list - largely because it’s already the most common overseas retirement destination for Brits.

Millions of us have experienced the delights of the sun, sea, and the lower cost of living while we were on holiday in the country, so it’s hardly a shock that so many want to experience it on a full-time basis in retirement.

Huge falls in the price of property has made this a cheap place to buy, and the fact that your state pension will keep pace with rises in the UK means you’ll be able to maintain your standard of living throughout your retirement.

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