In the first of two blog posts, we will discuss key reasons people speak to an Independent Financial Adviser about their pensions and retirement planning.
At first glance, creating a fund for retirement looks like a simple process. You pay money into a pension so that the date you want to retire, you receive enough money from the pension to provide sufficient income for your desired lifestyle, throughout your retirement years. In theory, it is simple – but without the correct approach, things can become more complex than at first, they may appear. This is especially true if you choose to pass on the balance of your retirement fund to your loved ones and/or other beneficiaries.
This complexity has increased the need for careful planning around pensions since the introduction of the pensions freedoms, which moved the retirement planning goal posts. These changes highlight the many reasons to see an Independent Financial Adviser throughout your pension journey.
Saving for retirement is not simply just about your pension (or pensions); it has been estimated that on average nowadays people will have saved into around 11 pensions over the length of their working life – it is about your entire accumulated wealth, through savings and investments, in particular when it comes to tax efficiency.
Seeking the best advice at the right time can positively affect your retirement plans whether you are just starting to save, approaching retirement or in retirement.
Setting achievable retirement goals
When a pension is first set up – whether a personal pension, a self-invested personal pension (SIPP) or a small self-administered scheme (SSAS) – often the end goal can seem too far in the distance to think about but having a reasonable idea of key facts such as the age you want to retire, and how much you are willing to contribute on a monthly basis (within the allowed limit), will help with identifying the retirement savings plan you’ll need.
There’s a balance to be achieved – save too much into a pension and you could fall foul of the annual and lifetime allowance limits; don’t save enough and you might not have enough for the retirement you want.
As an example, life and pensions provider Aegon recently calculated that people should be aiming to save about 15% of their earnings into a pension throughout their lifetime
The next question is where to invest your money to meet your goals. It is important to ascertain the level of risk that you are willing to take within your long-term savings. This sits alongside the level of risk you may need to take if you are to meet your goals.
For example, if you want to retire early then you may need to take more risk within the pension portfolio to have the potential for greater gains to achieve a large enough pension pot to meet that goal.
However, people often opt for the default portfolio offered by a pension provider without really thinking whether this is the best one for their circumstances and goals. This can lead to disappointment in 30 years’ time if their pension pot has not grown enough to sustain the retirement they would like.
This is where an Independent Financial Adviser can help by assessing and talking through the right level of risk for your needs and in selecting the right pension fund and the appropriate investments to hold within a pension or SIPP/SSAS.
Sustainable retirement income
One of the key areas when we reach retirement is working out where we put our pension funds in order to sustain our retirement plan. Before pensions freedoms most people bought an annuity with their pensions funds, which provided a guaranteed income for life, with options for index linking to keep track of inflation.
Post pensions freedoms, people wanted more control over their lifetime savings and potentially, to pass the unused balance on death to their beneficiaries, and because annuity rates have been historically low, more and more people have been opting for drawdown. This is where the pension stays invested and the pension holder takes the income they need from it.
As you can imagine, this type of income requires considerable levels of decision making about where the money is invested, the risk involved, and how much money can be safely drawn down from the portfolio whilst minimising the risk of running out of money later in life (or should long term care be required, for example). Into this heady mix it is also important to consider how best to take income when you are drawing Pension funds so that you ensure that you don’t unnecessarily pay too much tax.
Up until the pension freedoms, the Government set limits and required pension providers to review policies every three years, and to reduce income if it looked like funds were decreasing too quickly. Now, there’s no-one checking progress – in effect a pension can now be accessed in a similar way to an ISA.
The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.