Top pension advice and getting the right advice
It’s arguably never been more important to get the right pension advice, as retirement planning has become increasingly complex since the pension reforms of 2015.
By Alan Boswell Group
Whether you need help in setting up a personal pension, topping up your workplace pension, transferring or consolidating your plans or drawing down on your money, it’s vital that you know where to look for the best guidance.
With greater freedom to draw cash from your pension from age 55 comes greater personal responsibility and a greater need for sound advice to ensure you have enough money to pay for your retirement.
This guide outlines your options for pension advice and the different types of pensions to suit your own personal circumstances.
Where to get the best pension advice?
There is no shortage of options when it comes to getting pension advice, but some will give you a more thorough assessment of the entire marketplace than others.
Here’s a run-down of where you can go for guidance.
Your bank
Some banks offer financial advice, including pensions, and you may find it convenient to deal with an organisation you are already familiar with.
However, the advice you receive may not be truly independent - the bank may only be able to offer you the products they have available, either their own or other financial institutions they have a tie-up with.
Your accountant
Unless an accountant is registered to provide financial and pension advice with the Financial Conduct Authority (FCA), they won’t be able to advise on retirement planning, as their specialism will be in preparing financial documents like accounts and tax returns and advising on tax affairs.
Pension plan service providers
You could go direct to a pension plan service provider, who are obviously experts in their field.
However, they can only advise you on their products, so you won’t be able to assess if there are better options for you elsewhere. Also, they may not be able to advise you on your pensions as part of your wider financial affairs.
Independent financial adviser (IFA)
The key word here is ‘independent’. Some financial advisers are restricted in the range of products they work with, the providers they recommend, or both.
But an independent financial adviser (IFA) will provide the most comprehensive advice, covering the whole pension and retirement planning market.
An IFA will discuss your current pension savings and investments, and check that these align with your retirement goals and your risk tolerance.
This will give them the information they need to recommend the most suitable pension products or investments for your situation.
And because they aren’t linked to any specific provider or restricted in any way, you know that you’ll be getting impartial advice and access to the most appropriate options.
Financial advisers are regulated by the FCA and must abide by a strict code of conduct.
Free guidance services
More general pension information is available free of charge from the government-funded Pension Wise and Money Helper services.
Pension Wise offers impartial guidance to the over 50s, focused on the options to take money from your pension pot when you reach the qualifying age of 55.Money Helper offers general guidance on a range of financial matters, including pensions.
Neither service recommends any specific products or companies and does not give any advice about how to invest your money.
When should you seek pension advice?
The introduction of pension freedoms in 2015 may have provided greater choice in how you access your pension value into retirement, but it has also added a layer of complexity to decision-making.
As a result, people are increasingly looking for advice to help them make their retirement decisions, especially around pension or income drawdown.
Independent financial advisers can help you identify the right course of action to take and the right providers who offer the product you require.
But younger people would benefit from pension advice too, even if they have a workplace pension, which most qualifying people who work full-time in the UK do under auto-enrolment. Advisers can help you decide if you would benefit from supplementing your workplace pension via additional contributions and/or setting up a separate personal pension.
If you are self-employed or do not have a workplace pension, an IFA can advise on how best to plan for your retirement - even if it sometimes seems a long way off.
You can even speak to an IFA about setting up a pension for children long before they start their working life.
Which pension scheme is best?
There’s no such thing as ‘the best pension scheme’ because what’s best for you will depend on a number of factors, such as your age, when you plan to retire, the kind of lifestyle you want in retirement, and how much risk you can afford to take with your money.
An IFA will speak to you about all of these factors to tailor a plan specific to your needs.
Here, we’ll look at all the factors you need to consider with your adviser to get the best pension scheme for you.
Set your retirement goals
Setting your retirement goals is the first step towards knowing how to approach your pension plans.
Some of the questions you’ll need to ask yourself are:
When do I plan to retire? Deciding when you want to retire will let you know how many years you’ve got to save and give you a rough idea of how long those savings need to last. For example, if you retire at 55 (currently the earliest age you can access your pension pot), you’ll probably need more saved than if you plan to keep working until you’re 70. Working longer also gives you more time to contribute.
What kind of lifestyle do I want in retirement? You need to think about what you want to do in your retirement. How much you plan on spending in retirement will dictate how much you need to save to ensure you can afford to live the life you desire.
How much income will I need to achieve my retirement goals? Once you know the lifestyle you want to live in retirement, you need to ask yourself, ‘how much do I need to retire?’ What income will you need to sustain your chosen lifestyle? Remember that your priorities and requirements may change as you get older, so it’s better to overestimate how much you’ll want than to underestimate.
Will I need a flexible income? Would you like an income that can vary at different stages of your life? For example, you may want to spend more in your early years of retirement before living more frugally later on.
What is your risk tolerance?
Contributions into pensions are usually invested into funds, the value of which can go down as well as up.
When you take out a pension or decide to invest money into an investment fund, you will need to decide on the level of risk you are prepared to take on.
If your contributions are invested in higher-risk funds, there is greater potential for gains - but also greater potential for larger losses than a more risk-averse approach.
Your tolerance to risk may change with age, how much you have in your pension fund, and your other financial circumstances, but it’s worth discussing your options with an IFA.
Compare fees
When considering getting pension advice, it’s important that you compare the fees you will be charged by the various options open to you.
How do pension fees work?
Different organisations have different ways of charging fees for pension advice, and you should always be told what the fees are and how they are structured before you sign on the dotted line.
Financial advisers, like Alan Boswell Group, charge fees separately to any product, so there is no bias when selecting pension and investment schemes.
There are generally three ways financial advisers charge their clients:
Fixed fees: a flat fee that considers the complexity of the work and the likely time required to adequately research and make recommendations, as well as process the work afterwards.
Time-costed charges: an hourly rate, with the amount charged depending on the seniority of the adviser who does the work.
A percentage of the amount invested: you pay a percentage of the value of your portfolio, typically between 0.5% and 1%. This is generally used for ongoing work, perhaps where there are funds invested which are being managed.
How to pay for pension advice
Usually, financial advisers will give you the option of paying for advice by either issuing you with an invoice or by having the cost of the advice taken from a recommended product (where this is available).
Pension calculator
A pension calculator will help you forecast how much pension income you will receive in retirement and can give you a target retirement income to aim for, taking into account your salary.
The Money Helper website has a pension calculator that will help you work out how much you need in retirement and how much you are likely to have.
Check employer pension plans
Most people in employment will automatically be enrolled on their employer’s pension scheme, but it pays to check the performance history of your workplace pension.
Does it have a good history? What have the returns been like over time?
Many people automatically opt to pay in the minimum amount, but you could consider increasing your contribution as your salary grows.
Check to see if your employer will also increase their contributions if you choose to do so.
Check your state pension allowance
The State Pension is a regular payment you receive from the Government once you reach State Pension age and can be used to supplement your personal pension. You need to have 35 qualifying years of National Insurance contributions to receive the full State Pension.
You can check your State Pension forecast online, and you may be able to make additional contributions if you are short of the 35 years required.
The type of pension you choose should match your requirements
It’s important that you choose the right pension plan for you and constantly review it as your life and career evolves.
As we’ve seen, there’s a lot to think about, and you will need to be aware of the differing types of plans, their contribution limits, fees, and how your plan will be managed.
You should be clear about the plan’s investment strategy, the level of risk, and the fund’s past performance.
The right plan and the right contribution levels for you could change depending on your own retirement objectives and financial position, any current plan’s investment performance, and any changes in tax and legislation.
Read more: How do pensions work?
What is a top pension in the UK?
There are several types of pension you can use to build up a pot of money to give you an income when you retire.
They broadly fall within three categories: state pension, workplace pension, and personal pensions you set up yourself.
Here, we’ll summarise the main forms of pension to give you an idea of your options.
State pension: the government pays a weekly sum to everyone who reaches state pension age and has completed at least ten years of National Insurance contributions.
Workplace pensions: under auto-enrolment rules, all employers must provide a workplace pension scheme as long as you are classed as a ‘worker’ in the UK, are between 22 and state pension age, and earn at least £10,000 per year. Current plans are to reduce the age to 18 and remove the lower earnings threshold from 2025.
Personal pensions: a personal or private pension is one you set up yourself, with the money you pay in usually invested into investment funds or shares.
Self-invested personal pensions (SIPPs): a SIPP is a type of pension where you have more control over the investments made by your plan. You can manage the investments yourself or ask a financial adviser to manage them on your behalf.
Stakeholder pensions: a stakeholder pension is designed to be accessible to everyone and can be useful if you are on a low income or self-employed. They are a type of defined contribution pension that has a retirement value based on how much you pay in and how your investments perform.
Defined benefit pensions: usually a workplace pension, with the amount you get paid in retirement based on how long you’ve worked for the company and your salary while working (either your final salary or an average). The accrual rate will determine the proportion of your salary you’ll receive as your yearly retirement income.
Defined contribution pensions: the most common form of pension in use today, both in workplace and personal pensions, with your retirement income based on how much money you have paid in, which is held in investments (that can go down as well as up).
Annuities: an annuity, which you can buy with some or all of your pension pot, pays you a regular guaranteed income in retirement, either for life or an agreed number of years. When you buy the annuity, you can take up to 25% of your pension pot as tax-free cash - the remainder of your income is taxed as earnings.
FAQs
Are pensions better than savings?
There are pros and cons of using a pension or savings account to save money for your retirement. The main benefits of using a pension for your retirement planning are:
Tax relief - whether you have a workplace pension or a personal pension, your salary is taxed after your pension payments are made, effectively making every £80 you invest in your pension worth £100 for a basic rate taxpayer. Higher and additional rate taxpayers are able to claim additional tax relief.
Because you can’t access your money until you are at least 55, there is no temptation to dip into your savings like you could in a savings account, safeguarding your money for your retirement.
Your employer may match your contributions up to a certain amount, potentially doubling your pension savings.
If you start your pension early enough, the compound interest on your savings can make a huge difference to your eventual pension pot.
If you choose to buy an annuity, you will receive a guaranteed yearly income throughout your retirement.
Do pensions last for life?
It depends. If you choose to invest your pension pot in an annuity, it will either pay out an annual income for an agreed period, or for life.
If you do not choose to buy an annuity, it’s up to you to manage your pension funds and ensure that it lasts for as long as you need it to. It is therefore vitally important to take advice on the sustainability of your pension withdrawals.
What is pension consolidation?
Pension consolidation is where you combine more than one pension into a single pension pot. You can either move your pensions into an existing scheme or you can transfer them to an entirely new one.
You may benefit from speaking to a financial adviser to make sure you make the best pension consolidation choice.
Do private pensions keep up with inflation?
Your workplace or personal pension is made up of investments, so if your investments grow at a slower rate than the rate of inflation, then your pension pot will, relatively speaking, lose value.
However, at times of low inflation, it’s quite possible that the performance of your pension fund will outstrip inflation and increase in value in real terms.
The key points to look out for in a pension
There are a few key points you need to think about when considering your pension options:
seek professional pension advice from an independent financial adviser (IFA);
start a pension as soon as you can and save as much as you can afford;
set your retirement goals (a pension calculator will help), assess your appetite for risk, and make sure you are clear about the fees you will be charged;
make sure the pension you choose matches your personal circumstances.
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Please note, the value of investments and any income from them can go down as well as up and you might not get back the original amount invested. The past is not a guide to the future.
Tax benefits depend on your individual circumstances and the laws concerning these can change.