Need To Knows About Pensions and Retirement
What is a personal pension?
A Personal Pension in short, is a tax-efficient way of saving towards retirement. You contribute money in, the government adds a proportionate amount and for the employed, your employer may pay in too. They should, therefore, be viewed as an essential addition to the State Pension and a means of meeting objectives in retirement.
Who is holding your money?
These contributions are invested in funds in line with how much risk you would like to take. They will then go up or down in value every day based on how the funds perform. Using a regulated, well invested portfolio, the value should never be lost, albeit there will be periods where it will decrease in value as is the case with anything that is invested. In the longer term, any downturns will hopefully be overcome by growth.
When will you access your pension?
The pension is then locked away until age 55 at which point you can start to access the benefits from it should you wish, but without obligation. Depending on your view, some see this as an advantage in that you can’t be tempted to withdraw it earlier, although there are those that see the lack of access as a barrier.
When you do choose to access benefits, 25% of the value is available as a tax-free lump sum (not necessarily all at once), with the remaining 75% being available to draw from as taxable income. This was previously in the form of an annuity which is a guaranteed income payable for life. But more commonly utilised now is Flexi Access Drawdown whereby the plan stays invested and an income is drawn as flexibly as a member requires, with it then also passing to beneficiaries on death.
How much do you need for retirement?
I am often asked the question of ‘how much is needed in my pension at retirement?’ but that very much depends on what kind of lifestyle is required. Some clients have aspirations to sail around the world. Others to venture no further than their own back garden. Therefore, the target is to build as large a sum as is required for you personally to be able to spend your retirement doing what you desire.
An IFA’s role in a client’s retirement planning is vital. It may start with setting up a new pension or reviewing an existing plan to ensure that it is suitable in light of new rules and potentially more suitable plans being available. We would provide guidance on the risks being taken, recommend portfolios of funds within the pension plan to meet current needs and provide ongoing management of plans, as one off initial advice can be perishable. Clients generally then have peace of mind that their plans are being looked after and managed proactively so that their future retirement goals are hopefully met.
For those with existing plans, questions to ask with regards to whether you may benefit from advice include:
- How much risk am I taking and which funds am I invested in?
- Is my plan being proactively managed?
- When did my adviser last provide a review?
- Am I on track to meet my requirements at retirement?
- Am I fully aware of my options at retirement?
An understanding of these factors is key to your future planning. There are many people for whom any paperwork relating to pensions is just added to ‘the file’ without awareness of the potential importance of it. The need for advice pre, at, and post retirement is key.