Pensions Freedom has brought with it a huge amount of publicity in this area. Lots of speculation around over 55s taking their pension pots out in one go and buying expensive supercars. All of this misses one clear problem at retirement and that is the sheer complication of this area. The general knowledge gap that exists here is still too high. We need to ensure that the differences between pensions – the savings vehicle and the various methods of using those savings to replace salary in retirement is clear. The need for advice is at its greatest here. There are many options pre and post retirement that are not well understood.
It is vital that there is engagement during working years to ensure that the reality of income in retirement matches needs in retirement. With the state pension age increasing for some to 67 and probably higher than that with increased life expectancy there is a ticking time bomb of increased life expectancy and reducing income in retirement will leave todays workers unable to fund their own retirement.
Now the phrase retirement is an interesting one, I would suggest that to truly retire is to have the financial freedom to do whatever you want, this could occur any Saturday with a winning lottery jackpot ticket. However for those who do not win or even play the lottery then planning for your retirement is key. This will take the form of various savings vehicles from ISAs in their any and increasing forms, personal pensions, final salary pensions, property and other investments. The key is ensuring there is enough to give you choices.
Onto some of the pressing problems.
- Understanding that today’s workplace is fluid. This means that the days of one job and one pension for life are for most of us gone. With multiple jobs comes multiple pension pots and keeping track of these is very difficult. There are measures being taken – pension’s dashboard is one however ensuring that pension pots are not ignored and left languishing in high charging unsuitable investment strategies is key. To do this there is a need for advice to ensure you keep on track of these pots and make them work for you.
- Understanding the difference between auto enrolment, SIPPs, Final Salary and personal pensions to name but a few. If like a lot of fortysomethings and above you have a mixed bag of benefits then proper monitoring is key to ensure these work for you. Investment strategies should match your retirement goals and attitude to risk so ongoing monitoring is key.
- Targeting retirement, how much do you need and when do you need it. Just because your state pension starts at age 65 does not mean that is the ideal target age for your retirement. The demise of final salary pension schemes means that many are not saving enough and not aware of the pot required to replace half your salary from retirement until death.
- How much should you save? This question is akin to asking “how long is a piece of string?” This question is impossible to accurately answer as it depends on investment returns, income requirements, charges and timescales. The only answer is that for most of us the earlier you start the better chance you have of retiring when you want to. It is true to say that a fund will double every 10 years with 7% return. The second answer is that ensuring you know how much is in all those pension pots that are built up from your different jobs will enable you to plan.
- Should I consolidate? That again depends on a number of factors and it is key to analyse the different plans to understand charges, investment choices and how much each is worth. It is certainly easier administratively to have all your pensions in one place but this is not always the best course of action. Again advice and some guidance here is required.
- Should I transfer my final salary benefit to take advantage of pensions freedoms? Well we can at least say here that as long as you have a transfer value of over £30k then there is a legal requirement to take advice from a suitable qualified adviser. This will depend on the result of the analysis and your personal circumstances.
- What is the lifetime allowance, annual allowance and what does this mean for me? How does this work for high earners and those with substantial pension assets? Again advice here is key.
So the message is simply that the area of pensions and retirement is complicated, made more so with the advent of “Pensions simplification”, “Pensions freedoms”, multiple regime changes and the unintended consequences of legislation change. It will continue to be a complicated and misunderstood area so the message is clear, advice is key!
This blogpost is intended to provide a general review of certain topics and its purpose is to inform but NOT to recommend or support any specific investments or course of action. Taxation depends on individual circumstances as well as tax law and HMRC practice which can change.
You are not certain to make money – you may suffer a loss.
About the author
Owen Hadden is the Pensions Specialist at Prosperity with extensive experience in the retirement arena built up during his time as a retirement consultant with LV=. He has a keen interest in sports and when not working can be found on the tennis and squash courts around the west of Scotland. He lives with his family in the south side of Glasgow.