In the past many people had one employer and one pension for life. In the modern world it is more common to have several plans built up over your working life. It is always worth reviewing old plans to ensure you are invested in the right risk level, that your charges are not high and your fund is performing well in comparison to others.  It may be better to leave your pensions invested with the current providers, but a review could make a huge difference to your ultimate retirement fund.   

Pension tips:

• If you haven’t started saving into a pension – start as soon as possible.
• Make the most of your employer’s schemes especially if your employer matches your contribution.
• Set up structured savings with a direct debit or standing order to your pension fund.
• Review any plans you already have.
• Focus on building up your pension pot, rather than making decisions about how you will take your retirement income.
• Get projections and discuss projected outcomes with your adviser to keep on track.

Regular Reviews

Every financial plan will need to be reviewed at some stage but pension planning needs constant attention in order to keep your goals on track. Salary increases, inflation, investment returns and career change are all events which require us to re-evaluate your plans, we would always recommend a review each year. 

If you are near to retirement you are probably looking at your pension arrangements.  You may be receiving piles of paperwork from your pension providers informing you of the options on offer. Many people find this information confusing and difficult to put together. Here are just some of the questions that need to be answered:

• Do you remain with the current provider and take income from them?
• Do you transfer the funds to another provider who will pay you a higher income?
• Can you get a higher income elsewhere?
• If you do transfer, are there any valuable benefits you could lose?
• If you died after taking your pension, is there a benefit paid to your spouse or dependants?
• Do you require a guaranteed income for the rest of your life, or would you prefer more flexible terms? 

What is an annuity?

An annuity is a guaranteed income paid to you for life from an insurance company. The annuity would be purchased using the money you have built up in your pension plans during your working life. The insurance company will assess how long they think you will live and will quote the amount of guaranteed income they are willing to pay in return for your lump sum. All pay different rates, and there are various options you can include, so it is important to shop around. If your life expectancy is shorter, for example because you have an illness, the life company may be willing to pay you a higher income. This is because they don’t think they will have to pay you for as long. A large part of the calculation is based on your life expectancy.

Fortunately for us all, we are living longer.  Unfortunately, this means that the annuity income will be less, simply because the life company will probably have to pay you for longer.  Another issue affecting annuity rates is the yield on Government Gilts.  The life companies use these yields to calculate the income they will pay, the yields are going down.  Longevity and Gilt yields are the main factors affecting annuity rates. If you purchase an annuity now you will receive less than if you had purchased  one a few years ago.

The attractive aspect of annuities is that the income is guaranteed, something valuable to many people in retirement.  The negative is that you can’t change them once you have taken them out.  So if your situation changes the annuity cannot be altered.  For example, for a reduced income from outset you could take a widow’s pension which will continue paying an income to your spouse if you die.  If your spouse dies first though, this additional income would be lost. Death benefits are restrictive, so if you die early you may not have received a fair amount of money for the lump sum you have given up.  

What is a drawdown?

Rather than taking an annuity, which cannot be altered once taken, you may prefer to have a more flexible arrangement, commonly known as “Flexible Drawdown”.  You may wish to take your tax free cash, but don’t want to take income initially, leaving your remaining fund to continue to grow.  You may like the fact that you can leave the remaining fund to your family.  With Flexi-Access drawdown  if you die before age 75, the total fund can be left free of income tax to any beneficiary of your choosing.   Another benefit, if the drawdown plan is set up with a nomination for death benefits, generally the proceeds are not subject to inheritance tax.  

Another benefit of retaining your investment is that pension funds grow virtually tax free, so they are a good place to leave your money until you actually need it.

What is an Uncrystallised Fund Pension Lump Sum (UFPLS)?

If you do need your money straightaway, it is now possible to withdraw the whole of the fund, this is known as an UFPLS.   Beware though, generally only 25% of your fund will be paid tax free, the rest will be taxed as income. Perhaps it may be better to withdraw the funds over several tax years to pay less tax.