Pensions under the microscope
When I say ‘pensions’, what comes to mind?
Something to be dealt with in the future?
Something that will hopefully sort itself out later in life?
If so, you’re not alone. Too many of us put off pension planning until the last minute.
In fact, the average middle-aged investor in the UK has just £53,000 invested in pensions. That means a retirement income of around £3,500 every year – not enough to sustain a comfortable retirement. Poor choices, sky-high fees and confusing charges are to blame for this poor investment performance.
It underlines a serious message. Your pension is one of the most vitally important decisions of your life. Quite simply, your future is in your hands. The sooner you start thinking about your pension, the bigger (and better) the impact.
Here, we take a look at your pension investment options and how you can ensure a comfortable and financially secure retirement.
Defined contribution schemes
First up is a type of pension known as a defined contribution scheme. There are two main types:
- Self-invested personal pensions (SIPP)
- Stakeholder pensions
SIPPs are all about control, allowing you to choose from a huge range of investment options. You can select individual shares, funds, and many more – the choice is yours. SIPPs put you in the driving seat – you can easily log in and view or amend your investment choices online, so it’s no surprise they’re growing in popularity.
Stakeholder pensions were set up by the UK government in 2001 to offer a simpler option for pension investment and, through capped charges, to ensure that people were getting value for money. You can choose from a limited range of funds, or if you don’t want to choose, your money will be invested into a default set of investments. Your employer may also contribute to a stakeholder pension on your behalf.
What else is there?
So that’s the lowdown on defined contribution schemes. What other options are there? Commonplace in the past, defined benefit schemes are now a rare breed. If you are in a defined benefit scheme, count yourself lucky: they’re often very generous. These pensions are great value, but offer you no choice in how they are invested, so we won’t focus on them here.
What do I have? I can’t remember!
With most people changing jobs every few years, lost or forgotten pensions are a big problem for savers. To help, the government has created this useful tool to help track them down.
These pensions are known as ‘deferred’ or ‘frozen’ – but there’s good news: you can still access the cash, opting to leave it where it is or transfer it all into one place with a SIPP or stakeholder scheme.
Understand your existing pensions
Pensions might seem a bit of a mystery to many people, but recent changes to regulations mean you now have substantial rights to access information on your investments.
It’s critical that you wield these rights to find out about your current pension (or pensions) so you can accurately assess your true financial position. You can access the current balances, get retirement projections (an estimate of how much you’ll get once you retire) and much more besides. Be aware that the value of investments can go up and down, so treat all figures with a healthy dose of caution.
If you’re in a defined benefit pension scheme (or were in the past) you’re eligible for a Cash Equivalent Transfer Value (CETV). A CETV is a complex calculation, but it lets you transfer money from one pension to another. Because you lose certain protections, it’s best to seek advice from an expert before going ahead with a transfer.
Planning is a priority
So that’s a quick overview of the pension options available, and hopefully you’ve now found out how much you have across all of your past and current pension schemes. But before you take the next step you’ll need to grab a pen and paper to do a few sums.
Write down your hopes and expectations for your retirement – will you be going on regular holidays? Do you want a small or large house? What kind of expenses will you have? Match this figure against your current retirement income expectations and you’ll have an idea of the gap you need to fill. Don’t forget to consider your state pension when calculating this figure (currently around £155 a week).
Looking at a shortfall?
Don’t worry, most people have the same realisation: their financial expectations for retirement are way out of step with their existing pension capacity. However, with a solid pension investment plan, you can still improve your current position even if you’re approaching retirement.
Cutting out unnecessary costs
Transferring a pension or pensions to another option can cost money in additional fees, but a financial adviser can help you avoid these charges and find the best possible investment option (including SIPPs). Expert advice will usually mean more of your money actually gets invested rather than eaten up in fees.
Getting help from an independent financial adviser can help you build a solid and sustainable portfolio containing low-cost funds that give you maximised financial returns. Balancing risk against return while keeping charges to the absolute minimum is the secret to a safe, comfortable retirement.
The decisions you make today will truly change your fortunes in later life.
Reliable advice and a sound strategy can help you plot a course through the rocky seas of the current pensions market. For expert guidance on your pension investment options, call Flying Colours today on 0333 241 9900 or email firstname.lastname@example.org.
Guy Myles, Flying Colours – The UK’s leading financial advice and investment service