Retirement Planning and Pensions
Over the last century, the average life expectancy has increased by around 30 years. With life expectancy increasing, will your pension funds be able to sustain the lifestyle you’re hoping to enjoy during retirement?
There are two aspects to focus on, the first is building the right amount of wealth to ensure you have enough money for the rest of your life. This is accumulation. The other is finding the best way of spending your money in retirement, referred to as decumulation.
Both require great skill to maximise your position, and both have different characteristics.
Accumulation
You accumulate funds and build your wealth before retirement. This can last beyond retirement, as well, but essentially your years leading up to retirement are focused on making sure you have enough for the rest of your life.
There are so many unknowns in this, that you have to create a plan that can cater for the unexpected, and for your ideal scenario.
For example, you cannot predict accurately when you might retire, how long you may live, and what your health position might be.
You may have pension plans in place, through your work, or simply because you have chosen to save using this efficient method.
Or you might use other tax efficient plans, such as ISAs or EIS’s, or a combination of all of these.
How you manage all of this, all the various parts, and co-ordinate a successful overall plan to meet your goals, is far from easy, and professional help can make a big difference.
Decumulation
At some stage your position will change, probably at or close to the point you retire, and then you will need to start drawing down your wealth, or taking an income from your savings and pensions.
This is known as decumulation, and this is a very difficult process to manage.
Decumulation efficiency is a complex calculation, as there are so many factors to balance, and you will have various options.
It is easy just to take the first option or what may seem the simplest, but this may not have the best long-term outcome, or may involve subtle risks.
Getting help during the accumulation stage is important, in the decumulation stage – potentially critical if you want to optimise your position.
Trevor Downing IFA will be able to provide the advice you need, we have the experience and expertise to steer you through all the complexities of the retirement planning process, help with all your pension requirements, however complex, and whatever your starting position is. Whether you are looking to accumulate or decumulate.
More on Retirement / Pensions
Pension Tracing
There are over £2 billion of unclaimed pension benefits – lost pensions. Can you imagine such a large sum of unclaimed benefits? How can this happen?
People may have worked for different firms perhaps 20, 30 or 40 years ago or even longer and if they may have worked for a number of different employers, or have been self-employed and contributed to personal pension plans it is not surprising that pensions could be lost.
Pension benefits are quite often people’s second most valuable asset apart from their home and sometimes it is their most valuable asset. We provide a service where we trace lost pensions for people, providing them with much-needed cash. We’ve been highly successful tracing pensions, locating so many lost pensions which have made a real difference to our clients during retirement.
In addition to our pension tracing service, we have a service where we investigate pensions we find and assess the benefits people have missed. When we ask our clients questions about their past pensions, such as “Where is your money invested?”, “What is your risk profile?”, “Are there any exit penalties?”, The most common answer is “I have no idea”. Having discussed the importance of tracing lost pensions, a company out of the blue wrote to Trevor Downing telling him that he had a pension plan that he had completely forgotten about. He received a tax-free lump sum of £4650, highlighting how common unclaimed pension benefits are.
It seems attractive to combine all your pensions into one plan but that is not always the right thing to do. It can ease administration but where you have good pension plans in place and some which have good underlying guaranteed benefits, we recommend leaving them alone. Certainly, pension funds with high charges and poor fund performance should be transferred. We can help you manage your pension plans and ensure you receive the maximum amount of benefits possible.
Spousal Bypass Trust
A close contact and friend whom we have advised for over 30 years wanted his pension to pass to his son on his death, rather than his wife, in order to save Inheritance Tax. He had £1 million in his pension fund and his wife is independently wealthy, so passing the funds to his son was a smart choice.
Before pensions are drawn we have nominations and trusts known as a Spousal Bypass Trust that ensures that in the event of death your wishes are followed and it helps save Inheritance Tax on the first and second death. Very few people have this important Spousal Bypass Trust facility set up. We offer this service free of charge in relation to pension plans. It is an effective way to provide benefits while mitigating tax on your Estate.
Cutting through the complexity
It is not your job to understand the complexities of financial planning and potential products or solutions, it is ours. Once we have got to know you and your circumstances, we will set about finding the perfect solutions for you. We undertake thorough market research and analysis so you don’t have to.
We will then thoroughly explain the recommendations to you and ensure they are kept clear, appropriate and easy for you to understand. We do not want to bombard you with jargon – instead, we intend to ensure you understand how any solutions will work for you.
Salary Sacrifice
Salary sacrifice is essentially an agreement between you and your employer to reduce your salary in favour of an employer pension contribution being made to your pension scheme. So why would you give up part of your salary? Salary sacrifice can generate higher pension contributions than if you make the contributions yourself. This is because you can pass some/all of your corresponding National Insurance saving which increases the amount paid into your pension scheme.
Workplace Pension Scheme (Auto-enrolment)
Employers now must automatically enrol most of their employees into a workplace pension scheme, and employers are also obligated to make a certain level of contributions. These will generally be defined contribution plans.
If you earn more than £10,000 a year and you are aged between 22 and State Pension age, you will likely be automatically enrolled into your workplace pension scheme. If you want to opt out of the pension plan, you will need to tell your employer.
The minimum employee contribution is currently set at 5% of your qualifying earnings, while the minimum amount your employer must pay is 3%.
Defined benefit pensions
You may have a defined benefit workplace pension if you have worked at a big company or in the public sector.
If you have got a defined benefit pension, the amount you receive on retirement is usually based on the number of years you have been a member of the scheme and your salary (either your salary at retirement or an average of your salary during your years working). You will need to seek advice if you are thinking about moving a defined benefit pension worth over £30,000.
Personal Pension Plan
Personal pensions may be suitable if you are employed and not in a company pension scheme, or as an addition to a company pension. You may also wish to set up a personal pension if you are self-employed or if you are not working but can afford to put aside money for retirement. There is a huge choice out there in the market and we offer advice on the best pensions available, depending on your risk profile and the projected levels of return.
You pay a regular amount (usually monthly or annually), or a lump sum to the pension provider who will invest it on your behalf.
The final value of your pension fund will depend on how much you have contributed and how well the fund’s investments have performed. The companies that run these pensions charge you for starting up and running your pension. Charges are normally deducted from your fund in the form of product and fund management charges.
Self Invested Personal Pension (SIPP) / Small Self Administered Scheme (SSAS)
A SIPP (Self-Invested Personal Pension) is quite simply an enhanced version of a personal pension. As opposed to a pension being run by a traditional insurance company these are run by appointed Trustees.
A SSAS (Small Self-Administered Scheme) is a pension scheme normally set up by a limited company on a money purchase (or “defined contribution”) basis. A SSAS is primarily set up by private and family run businesses for the benefit of the owner, directors and family employees.
The members are appointed as Trustees to have control and flexibility over the scheme’s assets and investment choices. If all members are Trustees, a SSAS benefits from many exemptions from pension legislation applicable to other pension schemes and so permits a greater range of investments and fewer administrative requirements than other occupational schemes.
Previous Employer Pension Schemes
Pension Consolidation
You may have a number of pension pots either in Personal Pensions or (as mentioned above) from various employers. Managing these various pots may not be the most efficient way of managing your retirement savings.
Pension consolidation involves bringing all your separate pension plans together and combining them into one single pension pot. The option to combine all these pensions can make financial sense.