Many people think that just having a pension means they will be financially prepared for retirement, but they don’t always understand that it’s necessary to review these plans on a regular basis. ‘I don’t want people to be ambushed by their pensions and become disappointed with what they end up with,’ says David Cummins, Chartered Financial Planner based in Kent. ‘You may think you’ve got a sizeable pot that will give you a good level of income but in reality, it may not live up to your expectations.’
As part of our Pension Week campaign, we sat down with David to discuss why it is so important to review your pension and retirement plans on a regular basis with a professional adviser.
The pension landscape has changed massively over the last 20 to 30 years. People who have had a pension for a long time often initially set them up with a particular funding pattern in mind and with a certain investment approach that has not been changed since the plan was set up. When they are approaching their selected retirement age, if they haven’t reviewed their pension position they may well find that the pension is not going to achieve what they want it to and that this pattern and approach became unsuitable many years beforehand.
This is due to a number of reasons:
I often find that people do not appreciate these changes or understand how the different options could benefit them. A pension review is essentially a pit stop, giving you the chance to look at everything with a financial planner to see ‘am I heading where I want to go?’ Ideally, you should review your pension at least 10 years before you retire, but even if you are five, three or just one year away from retirement, it’s important to sit down and look at what you have, what your options are and what lies ahead for you personally.
A pension review is essentially a pit stop, giving you the chance to look at everything with a financial planner to see ‘am I heading where I want to go?
The danger is that often, you don’t know what you don’t know. If I wanted to build myself a new house, I would employ an architect, surveyor and builder because frankly, it’s not something I could do myself – I don’t have the knowledge or the skills required! When it comes to pensions, if you’re not talking to someone who is suitably qualified, you’ll probably be ill-informed.
If you can use other income sources to fund your retirement, you may be able to pass your pension on to your beneficiaries tax-free.
For example, I met someone recently who wanted to discuss buying an annuity using their pension fund. They had an awful lot of money in cash on deposit and other investments. I asked them why they wanted to buy an annuity and they said ‘well that’s what you have to do, isn’t it?’ I told them no, not necessarily, and an annuity might not be the best option for them. After looking at their other investments and assets, they could take a tax-free income for many years without even needing to touch their pension fund. Therefore, by not using their pension, this could reduce their Inheritance Tax liability for their family. This is because pensions don’t form part of your estate and are free from Inheritance Tax. If you can use other income sources to fund your retirement, you may be able to pass your pension on to your beneficiaries tax-free.
Absolutely. A pension is an investment just like any other, for example, a property or stocks and shares portfolio. They all have different tax rules and not just those related to Income Tax – we’re also looking at Inheritance Tax and Capital Gains Tax. If we can optimise a client’s tax position, we need to do so by looking at everything they have, including their pension. This helps to achieve the most tax-efficient, long-term financial security for both the client and their family.
There is a huge market out there for getting pensions into payment, so people could opt to take their pension income without reviewing their investments. This could mean that you end up taking an income at a time when stock markets and therefore, fund values, are low. If you do this, you could unknowingly end up doing long-term damage to your pension pot.
At Tilney, our two-expert approach could help to protect your pension from such damage. Our financial planners will work hand-in-hand with our investment professionals to ensure that you are making the most of your pension. As a financial planner, I will create the strategy and structure your assets. Your investment manager or adviser then builds your portfolio and looks after your investments, including those held within a pension. If you want to take an income, they will identify which is the best fund within your pension to take income from at a particular time based on their knowledge of its performance. This can then alleviate the potential damage caused by withdrawing money from the wrong fund.
It could potentially be a lot less expensive to transfer an existing plan out to a new arrangement.
Also, I find that many people do not take the cost of their pensions into consideration. Many older pension plans are far more expensive than newer ones available today. Today, we have a far more competitive pensions market and it could potentially be a lot less expensive to transfer the existing plan out to a new arrangement. A financial planner will be able to advise on what is the most suitable option for you.
Overall, if you think about a financial jigsaw, pensions are normally one of the biggest pieces of the puzzle. For many people, the value of their pension is second only to their home, or is sometimes even more valuable. In the same way that you would pay a lot of attention to the care and upkeep of your home, you should give this same level of attention to your pension. Just because it’s ‘behind the scenes’, especially if you’re not using it currently, this doesn’t mean that you can ignore it!
If you think your pension would benefit from a review, the first step is to book an initial telephone pension consultation with our pension experts. The consultation doesn’t need to take long and there is no charge for the first call – it’s simply an opportunity to find out how we can help you. Just complete this short form or call us on 020 7189 2400 to book yours.
Before you consider transferring a pension, it is important to ask yourself: Will I lose any valuable benefits or features from my existing pension plan? Will I incur any penalties on my existing pension if I transfer? Is it an occupational final salary pension scheme? (in which case it is very unlikely to be advisable to transfer) Have I considered the charges on my current plan? (a new arrangement may be more expensive – especially if you have a stakeholder pension). Exit fees may apply if you choose to leave Tilney.
Advice in relation to Inheritance Tax planning is not regulated by the Financial Conduct Authority, however, the products used to mitigate IHT may be regulated.
Please also read the Important Information below.