In our continual bid to help as many people as possible reach the goal of having a ‘financially secure and comfortable retirement’, we present and comment on some of the interesting articles we see. One such article appeared in The Telegraph a few weeks ago. It listed ‘five steps to pension perfection’ (read the article) and we thought it so good that we decided to comment on each of the five steps in a mini-series.
It comes at a particularly appropriate time as we’re putting the finishing touches to the ‘Pensions’ section on our website (visit Pensions). There’s a lot of useful information in this section and we hope we’ve presented it in an easy-to-read yet informative way. Our aim is to make the subject of pensions less intimidating so we recommend you visit the website if you’d like more information about what we’re saying here.
The Telegraph’s Sam Brodbeck suggested that anyone wanting to get a grip of their pension does so in five steps: 1) make sure you know what you’ve got; 2) boost your contributions; 3) maximise tax relief; 4) match your investments with your plan, and 5) consider alternatives.
If you’re going to make a commitment to saving for a ‘financially secure and comfortable retirement’, you really need to think about what your retirement may look like. Although that may sound impossible, particularly as it could be decades into the future, if you’re going to make the sacrifices needed to save for a worthwhile pension, forethought could make quite a difference to what you eventually receive, how you receive it and when you can have it.
You may be heading towards having three types of pension: your State Pension, one or more workplace pensions and, possibly, some private pension plans. However, that doesn’t mean that, come the day you retire, your salary will be replaced by an income from all of them.
The State Pension you’ll receive depends on the NI contributions you’ve made and, assuming you’re going to be eligible for the maximum, you’ll receive just over £8,000pa. However, you won’t be able to receive it until you reach State Pension age which, as it’s steadily increasing, may not be until you’re in your late-sixties. It’s usually paid into your bank account every four weeks so will represent an ongoing income of about £620 a month.
Recent legislation allows for much more freedom about what you can do with any workplace pensions you may have. You may decide to take the monthly payments offered by a maturing defined benefit (final salary) scheme to replace your wages or salary but you may decide to cash it in. If you’ve a defined contribution (money purchase) scheme, although you have to take your ‘pension pot’, you are now free to do what you want with it. In either case, the money is yours: you can take it as a cash lump sum or reinvest it, perhaps via an annuity or income drawdown plan that provides an income on a regular basis. They’re important decisions and may be heavily influenced by what’s happening in your life at the time, for example: what if you don’t want to retire when they mature?
If you have a private scheme, or are considering one, you’ve much more freedom about what you do with the money providing the terms of the plan allow it. Ideally, you need to have an idea about what you’re aiming to do when you retire before you make any commitment, particularly as many pension providers use ‘default commitments’. So, for example, if your plan is effectively locked until you reach 65, you may not be able to retire at 60.
Without a crystal ball, knowing what your circumstances will be in 20, 30, 40 or even 50 years’ time is, of course, impossible – but if you’ve got some pension plans, managing them towards definite goals, even if they change over the years, can only be a good thing. Pensions are incredibly complex so the recommendation is always that you talk to a suitability qualified, independent financial adviser and use their experience to ask you the questions you need to answer to be able to effectively manage your pension: it’s called retirement planning.
One Financial Solutions is here to help you. As independent financial advisers we’ll do just that: we’ll review your circumstances, help you understand your aspirations and explain what you need to do to reach them. It’s good to talk so please call us on 020 3714 9565 for a confidential chat or ask us to call you by sending an email to email@example.com.