Pensions Explained without the Jargon! Pt.2

Murray & Spelman Financial Services explains everything you need to know about pensions!

Last week, I covered the first 5 areas:

1. Pension Time Bomb – explained
2. Who does this concern? – everyone
3. Why use a Pension as the solution?
4. What to do next?
5. What type of Pension should I choose?

All of the above covered why you need to have a pension in place, what options work and how to set up a pension. This week I will cover, “how much should I pay in” and what to do, now that you have a pension.

Here are the second 5 areas to consider:

1. Maximising Tax Relief

The tax reliefs available are generous but will change when “Auto-enrolment” is introduced. Whether you are a Director, Partner, sole Trader, or Employee, where possible, aim to maximise your tax relief. As from experience there may come a time when you will not be able to pay into your pension due to your maternity/paternity leave, or savings for a mortgage etc.

Remember what Einstein said about compounding! Any money contributed now will still compound for you, even if you have to reduce or stop contributions completely for a period. Aside from this strategy, the first step is to JUST START!

You can then sit down with your Independent Financial Advisor to discuss what type of future you desire, for retirement and the kind of lifestyle you want. For you this could mean a frequent holiday abroad. For others it could mean being able to treat yourself and your loved ones to a meal out each week, or spoiling yourself with a trip to the hairdressers, a golf trip, or both on the same day!

An enjoyable retirement is one where you have the financial freedom to make choices. Unless income is stored away appropriately, it’s unlikely you’ll achieve this kind of freedom. Once you have determined your retirement goal, we can work backwards to see how much every year and month you will need to save and reach your goal.

Other factors that will influence the growth of your fund are:

• Your attitude to risk and capacity for risk
• The time until your chosen retirement date
• Understanding the above points will help create a tailored investment strategy
• There is still risk in taking no risk, meaning, your fund needs to grow. Deposits rates and very cautious funds will mostly give you negative returns
• Finally, do you have any desire to leave assets behind for the next generation?

2. Annual Review

It is imperative to review your pension with a qualified professional advisor every year, regardless of your age. At this meeting, you can discuss the following:

• Have your circumstances changed since last year?
• Is your fund choice still suitable?
• Have your objectives changed for the future?
• Are you on track for your desired retirement?
• If not, what additional funds are required?
• Is the date of your retirement still the same?
• Fund performance – how has my fund performed compared to peers?

The closer you get to retirement these conversations become a little more “real” for you. What type of option you will choose – Annuity v’s Approved retirement funds? Are you in suitable funds in the years close to taking your retirement benefits? A fall in your value close to retirement will have a significant impact on your future plans and retirement timeline. Therefore, it is vital you get proper guidance and review your pension.

3. “I’m sorted – I have a Pension already”!

You need to know what income your pension will provide in retirement, it is not enough to say, “I have a pension”. Don’t wait until retirement to answer this question, unfortunately, at that time it’s too late to rectify! So, whether you are in a Defined Benefit or Defined Contribution and your employer is paying into your pension, review to make sure you will have an adequate retirement income. The Proposed Auto-Enrolment outlined in the Strawman paper by the Government is that the employee (you) will pay 6% of your salary, the employer will pay 6% of your salary and the government will pay 2%. My issue with the proposal is that while it may sound good, I expect it won’t come close to enough for most people to provide sufficient income in retirement.

4. Get Unbiased Advice

When you meet a qualified experienced advisor, like myself, you will be given a terms of business outlining a lot of important information. One such area of information is; how we are remunerated. This can mean fee, commission or both. It’s important that the person you seek advice from is upfront and transparent with you. Another document we provide is a list of the pension companies we have access to. This is very important as some advisors may be tied to one company; i.e, all the main banks are not in a position to provide fair market analysis as they don’t have access to the market. Seeking advice from an experienced advisor gives you peace of mind, so that you will have access to the best solution on the entire market.

5. START NOW!

Don’t wait any longer, the “future you” will thank you for it! If you are an employer or employee and have a pension in place, review it now or reach out to us for a second opinion. Most advisors will provide this service without charge.