Pension Advice is a type of Financial Advice that focuses on a client’s pension arrangements. This ranges from how to best set up and grow a pension pot, working out the best and most tax efficient way of accessing a pension or for those already drawing a pension making sure to maximise the income and make sure it doesn’t run out.
Your pension is important not only because it’s one of the biggest assets you’ll have in your lifetime but because you will rely solely on it for a large proportion of your life. After you retire it could be your only source of income for several decades, and how much you have will directly influence the type of retirement you can have.
There are both monetary and non-monetary benefits from pension advice. In pure monetary terms, a recent study by the International Longevity Centre, “Revisiting the Value of Advice“, found that pension wealth increased on average by £47,706 among those who chose to take advice compared to those that didn’t. This was over a time period ranging from 8 to 15 years. Those that also used ongoing advice found an additional 50% increase in the size of their investments compared to those that just took advice at the start of the study.
The following article runs through some of the ways financial advice on your pension can make you better off in retirement. If you have any further questions on pensions or anything else financial then please get in touch. We are Bristol Financial Advisors and are happy to talk about pensions and any other financial questions you may have.
Although there are important non-monetary benefits of pensions*, generally the bigger your pension pot is in cash term the better. Bigger Pot = Bigger Pension Income = Better Retirement.
Unless you have an increasingly rare Defined Benefit/Final Salary pension then the money in your pension pot will be invested in a range of different funds, bonds, shares and other assets. Making sure your pension money is in the right investments is key to maximising the growth of your pension pot. There is no set “best way to invest” and when looking to boost the long term value and growth of the investments in your pension pot an adviser will help you develop an effective investment strategy. Your investment plan will take into account your investing horizon, risk appetite, capacity for loss, objectives, employment, tax situation and others to ensure you select the most appropriate investments for your individual situation.
What is often overlooked is the very important fact that your pension pot does not need to stop growing once you retire. Many make the mistake of assuming that at the point of retirement all of their pension pot needs to be converted into cash, to be kept nice and safe for their retirement. Yet as retirement can last for several decades this is a massive missed opportunity for continued growth, which can result in a bigger pension income. Or to think about it another way, there is money in your pot when you retire that you wont need to turn into income until you’re 80, or 81, or 82. That money can be invested for part of all of the time between retiring and hitting that age, meaning it will be likely be bigger and give a higher income when reaching those ages.
The benefits of ongoing advice are often overlooked, but there is also value to be had by ongoing advice. Often overlooked as unnecessary, there are in fact clear performance benefits for ongoing advice. It’s unlikely to have the same immediate impact as initial advice, but given the costs are only a fraction (usually a quarter or third) of the initial advice, your adviser is more familiar with you and your portfolio and that all of the gain each year keep compounding, it is often more cost effective than the initial advice, in terms of performance.
*Money isn’t everything, and there are non-monetary aspect of pensions that are also important, so it’s not all abut making your pot as big as possible. Non-monetary benefits include things such as inflation linked pension income, passing on your pension to a spouse or passing on your pension outside of your estate for inheritance tax. So while it’s a good idea to try and grow your pension as much as possible, you need to be aware of other non-monetary aspects as well, which is where a pension adviser can help.
Expert management of your portfolio, taking into account goals and cash needs. A partner to help you navigate complex financial situations, answer questions as they come up and may provide continuous comprehensive financial planning. Peace of mind knowing a professional is monitoring the market and your portfolio, and making needed change
During the “accumulation phase” you focus on building up your pension pot to be as big as possible. Once you fully or semi retire the tables turn and you have to start drawing down on this pot to create a pension income.
Your pension pot can be accessed in several different ways to create a pension income. How it is best accessed depends on your own situation including the size of your pension, which types of pension, your age, your retirement goals, your income and tax situation.
The main way in which income can be boosted from a pension is maxing tax efficiency; reducing the amount of tax payable to maximise the money left over. There are a variety of way to reduce the tax burden, and which will work best for you will again depend on your particular situation. As well as reducing income tax there is also the opportunity to use pension planning to reduce inheritance tax which is discussed further down in the article.
Different types of pensions allow pensions to be accessed (including for income purposes) in different ways, and it may be the case that your better off switching to a different pension type, even if there is a cost, because it allows for more flexibility in getting income out (which will lead to a bigger gain that the cost of transferring).
There is a lot of, understandable, focus on the importance of building a pension. Working with a pension advise can help you understanding the importance and benefits of the different choices you have when you come to access you pension.
It can be difficult to work out how much a £100 monthly contribution to your pension pot today will impact the pension income you receive several decades down the line. It can also be difficult to picture how much income you will need in retirement for the lifestyle you want – after all as you retire your lifestyle, wants and needs will likely change dramatically. Financial Advice around pensions and retirement can help you to better understand the link between your current contributions and the type of retirement you can afford. You can then better plan how much more or less you want to contribute and the likely effect it will have. It will help answer questions such as:
Since the introduction of Pension Freedoms in 2015 there has been a lot more choice in how you access the funds in your pension. In contrast to the old system, where you were pretty much forced to buy an annuity at the point you retired, you now have a range of options about how and when you withdraw your funds. The additional flexibility allows you to tailor your pension to your individual situation and maximise what you do with the money you have been saving.
Not all pension providers offer all the options that are available, so you may need to move providers to gain the flexibility. Yet there are plenty of other reasons to consider before deciding to move pension provider, such as charges, other flexibilities and guarantees given up. A pension adviser will be able to help you navigate the choices and help determine if you need any extra flexibility and if so help select a provider that allows you the flexibility you need.
Another way that pension advice can directly save you money is through a reduction in fees and charges.
With each pension provider charging a platform fee with additional fees for trading, holding assets etc the total cost can quickly increase when there are multiple platforms. With a pension pot combined onto one platform these duplicate costs are streamlined into only one.
As well getting a reduction in the number of duplicate charges by combining into one, your pension adviser can work out which pension provider can offer you the lowest charges (although this will obviously not be the only reason for choosing a provider).
Savings can always be made, and although sometimes they may be small, sometime they can also be very significant. And when compounded up over the years even small amount can make a big difference.
Many people in the UK have pensions in which they have little idea of what they are invested in. This is especially true of occupation (workplace) pensions schemes which are usually invested in large companies, which usually include fossil fuels, tobacco, arms etc.
If this is a particular concern, a Pension Adviser can help you move your pension into more ethical investments and help guide you through all of the different types of Green and Ethical funds and other financial products that are eligible for your pension.
If you have a defined contribution pension then there will likely be a set of investments sitting within the pension. The pension acts as a wrapper, with your funds inside. These funds need to be invested in the best way possible to make sure your pension grows as much as it can to generate a bigger pension income for your retirement.
There are tens of thousands of funds and hundreds of thousands of shares than can be bought and placed in side a pension scheme (if you have a pension scheme that allows this, which is another potential benefit of consolidation!))
To make sure the investments within the funds are the right fit for you an adviser will help you find the right alloaction and mix of investments for your particular level of risks and your situation. Recent analysis undertaken by Profile Pensions showed that 52% of customer pensions were in investments that were inappropriate for their needs and risk level. A pension adviser can give you confidence your pension is invested properly and monitored by an expert.
When you start to draw your pension you may continue to work for the first few years, but eventually you will have to rely solely on the pension pot you have been working on building up. You may have several different pensions and a mix of Defined Benefit and Defined Contribution all giving slightly different benefits and guarantees.
As these pensions pots now have to sustain you for the rest of your life, the main risk becomes depleting yours pensions too early. With people living longer than ever before, it’s a valid concern.
Any Defined Benefit schemes that are paying out and any State Pension you have will likely be guaranteed for life, so will form an important foundation of any retirement income. But with the state pension currently paying a maximum of £172 a week (2021/22) many will not be able to have the retirement they want on this amount, requiring to be topped up by private pensions.
Having a long and healthy life is a fantastic thing. Your time in retirement should be spent enjoying it and not worrying about whether or not your assets will last. Pension advice can help alleviate your fears by helping you to plan effectively and arrange your retirement to ensure you don’t run out of money to live off.
Pensions are inherently complex and this combined with the large number of rule changes and new and discontinued pension types over the years had made the current pension landscape difficult to understand.
A Pension Adviser can not only understand the labyrinthine of pension rules and regulations but can help translate them and the impact they have on you and your pension into plain English. Your pension is one of the most valuable possessions you will have over your life, and it’s important that you understand what’s going on if yo are going to make the right later life choices.
Pension consolidation is when you combine all of your old pensions into one single pension pot. With an average pension having 11 jobs in their career and many leaving their workplace pensions are when they change jobs, this creates a lot of pension pots dotted around for most people. Consolidating all of the pots into one can have several advantages:
It’s not always in someone’s best interest to consolidate, but a pension adviser will be able to help you decide and work out if it is worth it.
There is usually no inheritance tax (IHT) to pay on any pensions you pass on. Any assets inside a pension are normally deemed outside of your estate for inheritance tax purposes and so wouldn’t become subject to inheritance tax. This makes pensions a useful estate planning tool as you can leave your pension untouched and fund your retirement with other assets that do form part of your estate. Moving your pension pot to a scheme that allows this to take place may be required.
With a defined benefit pension there are no assets to pass on, so the IHT benefit does not apply. Pensions in payments can often be passed on to surviving spouses however and there are often generous death benefits in place as well.
Annuities used to be pretty much the only game in town when it came to retirement, but since Pension Freedoms were introduced in 2015 and more choice was made available, they have become a lot less popular. However they can still form an important part of retirement planning and a good and effective pension plan should consider the part that annuities can play.
There are a wide range of annuity types available, from Lifetime, to Investment-Linked, to Enhanced with each type being appropriate in different situations. It is also not just the type of annuity that needs to be considered, but the amount of your pension that should be committed into an annuity and at what stage.
It can be very difficult to change an annuity once it has been taken out, so careful consideration must be made. You can find out more in our guide to annuities article.
A Pension Advisor and a well thought out retirement plan can help to make sure you make the right choices when it comes to annuities and your retirement.
As people increasingly have several jobs over their lifetimes, and with almost all employers now offering workplace pensions, it’s commonplace to have several old pensions built up. As time goes on, jobs are changed and forgotten, and houses are moved several times, you and your pension fund can lose contact with each other and can be forgotten.
An adviser will be able to help search for old lost pensions and can work out the best way to access them, whether by consolidating them into a current pension, cashing them in or leaving them where they are (but keeping an eye on them!).
Over their working lives most people tend to make a financial mis-step or two along the way. Whether it’s a mortgage taken out at the wrong time, an investment in a stock that plummeted or an expensive jacket that’s never worn, we kick ourselves, learn a lesson and move on. We can do this safe in the knowledge that we have years of earning more income in front of us. However , once in retirement this changes and the ability to continue to earn reduces, placing a lot more importance on making sure what you already have is protected and that it can provide enough for you to live the retirement you want without the fear of running out of money.
Having a trusted Pension Adviser work with you can help alleviate a lot of these concerns. Not only can you be safe in the knowledge that you have a professional working on your retirement plan to make sure it works in the best way, but a good adviser will always make sure that you understand how your pension is arranged, including how much you can afford, the consequences or taking more or less than planned and most importantly that you won’t run out of money.
Pension Advice can be valuable at different stages of life, although the type of advice you need and how much it will cost and benefit you will change depending on which stage you are at.
Thinking about pensions tends to mostly happen later in life, but there are huge opportunities to be gained by starting early. And it’s not just the compounding of all your early investments into a much larger sum that’s the benefit, there are choices you can make that can lead to a much better later life.
Making the right choices early on, from how much you put in, to what you invest in to how your pension and other retirement savings are structures, all can have a huge impact later in life.
Nearing retirement is the point at which many seek pension advice as they begin the transition from a working life to a retired one. This transition can take a long time though as these days many chose to “semi-retire”, continuing to do some work whilst drawing a pension at the same time.
This is one of the most important parts of the pension journey – arranging your retirement finances in the best way at this point will give you a solid foundation for the next stage of life, where the responsibility shifts more to the individual to look after their retirement pot or pension income. With the introduction of Pension Freedoms (see Pension Freedoms Article for more information) there are a lot more choices and opportunities for those reaching retirement age and approaching retirement in the right way can help boost your retirement income and reduce your tax bill.
Once in retirement many think that there are no more opportunities to boost their pension. However, for many there are many opportunities to increase their wealth during retirement.
These days retirement can last for decades, and its always a good idea to see if you could ensure your funds lasted as long as you needed or were boosted to help enjoy your retirement or pass on more to your loved ones.
Please visit our Investing in Retirement page for more information on making the most out of your pot after you retire.
There are many valuable non-monetary benefits to Pension Advice, such as peace of mind and a knowledge of when you can retire and with what. Yet it’s important to have an idea of how much monetary benefit pension advice can bring, especially if you want to work out if its cost effective to pay for pension advice. For this you will need to speak to a Pensions Adviser who will be able to calculate the potential benefits.
If you’re saving into or ready to draw from a pension, knowing when to seek independent financial advice from a pension adviser could make all the difference to your retirement planning