A penchant for pensions

What’s so good about pensions?

Pensions are a great way to save because you benefit from additional tax-relief increasing the investment immediately.  

Many of our clients pay higher rate income tax, so they’ll get even more tax relief than those on lower incomes. For example, if you pay tax at 40%, you can put £60 into your pension and £100 will be invested. Later in life, when you’re ready to take money out, you’re likely to be paying a lower income tax rate, but to have benefitted from years of compound growth.

Pensions don’t count towards inheritance tax so, unlike other investments, they avoid a 40% tax charge on death. If you have a company, you can get corporation tax relief on pension contributions, and if you have a workplace pension, your employer may also put money in for you.  

Pensions are all about regular payments and long-term savings, and that can also boost your wealth.  

Your pension savings are invested by professionals, bringing expertise that can make a positive difference. Over your lifetime, you can start with higher-risk investments and gradually move to a lower-risk portfolio, aiming to put more in your pot.  

I’ve heard pensions are pretty flexible now. What does it mean for me?

Once you hit the right age, you can often (depending on the type of pension) do exactly what you like with your pension money. But you’ll want to do it in a way that maximises your income and minimises tax. It can be a huge responsibility knowing you have to make your money last for the rest of your life, and cash flow planning is a great way to tackle this.  

You can take 25% of your pension fund as tax-free cash. Some clients think of this sum as being suitable for a big splash and get pretty excited about it.  

There are still rules though, including restrictions on how much you can save tax free. Reaching annual and lifetime limits can raise questions about when to stop paying in. You may also want to think about protection, to cover you for the unexpected.  

I have a defined benefit (DB) pension – what are my options?

We work on the conventional wisdom that a DB pension is golden, as it guarantees you a set level of income for life. However, it’s still worth asking if that particular pension fits the bill. It could be that you want more flexibility, or you might find better benefits elsewhere. Advice must be personal.  

Moving out of a DB pension is a big decision. We have a team of highly trained specialists who can advise on this, which is unusual, and we ask external partners for a second opinion, to make sure the advice provided is absolutely in the client’s best interests. This is quite rightly a specialist and heavily regulated area, which is why we take such a thorough approach.

I have a defined contribution pension – what are my options?

When you’re ready to start drawing retirement income, there are tough choices to be made. You could buy an annuity, where you’re given an income for life, or go for drawdown, where you just take your money out gradually, or a combination of both. Again, cash flow planning can be extremely helpful with this decision.  

We are experts in helping people plan and manage retirement income, as we have hundreds of people working behind the scenes to deliver investment management, along with financial planners with access to specialist support. We take this comprehensive approach to help you feel confident in those moments of big decisions and with managing income flow.

I have several pensions – should I bring them together?

We call this consolidating, and there are pros and cons. Having everything in one place is certainly easier to monitor and manage and could reduce fees and increase returns. You might have ideas about a product or approach you think is better, for example sustainable investing, but always remember some pensions come with excellent benefits which you may want to hold onto. Read the small print carefully and seek financial advice before taking action.

The value of my pension has taken a big dip. What should I do?

If you’re younger, the advice is often to sit tight and keep saving - you’ll come out the other side. But that’s not to say you shouldn’t take some action, even if it’s just to reassure yourself. You need to feel comfortable you’re doing what’s best for you. Understanding and reviewing the pension, what it is invested in and how its performing should be done at least annually.

If you’re about to retire, consider delaying. Review all your investments – pensions, ISAs, everything. Our investment team helps us navigate all of this. If things get a bit uneasy, they’re on the ball. They can reduce positions, change asset allocations and look after whatever you need to do. We tackle the issues and adapt your plan to ensure you can make informed choices about your retirement plans.  

Everyone should review their investments and financial plans at least once a year, or more frequently if you’re concerned. It’s about drawing on all the right resources that give you confidence in your decisions.  

If you’d like to make the most of all the good things that pensions bring – get in touch for a free, impartial conversation.