If you are amongst the very few people who understand pensions inside and out, back to front, then you are very lucky indeed. This is a subject that seems to be mystery to many, and with constant changes in rules and regulations, it’s no wonder that more and more people are choosing to hire a financial adviser to help them with their pension issues.
It’s never too soon to start thinking about a pension, even if it does seem like a daunting conversation to have. Pensions often seem like a subject which should be discussed close to retirement, but by this time, your pension should already be at its bulk amount, ready for you to pick away at during your retirement years.
Basically, as soon as you begin working, you should put aside some cash every month in a pension scheme, whether that is a private scheme or a company pension option. Some people choose to go down both routes, and that is a very sensible idea indeed. Whilst working alongside your state pension, you will have enough to live on comfortably and enjoy whilst you’re not working.
First things first, let’s start at the very beginning, and then work up to telling you exactly why you should be thinking about using a financial adviser for anything pension-related in your life.
What is a Pension, and Why is it Important?
Most people understand that a pension is something you pay into every month through your employment years, which then goes towards funding your life when you retire. You don’t need to be a rocket scientist to release that once you stop working, yes, you don’t have to get up and go to the office in the rain anymore, but you also don’t get that monthly influx of cash, via your salary either. There are pros and cons to everything!
Pensions come in different shape and sizes. There are state pensions of course, but these are unlikely to give you the kind of lifestyle you want or deserve when you finish working, and most people choose to supplement and top these up with a private or company sponsored scheme during their working time. Put simply, a state pension is meant to give you enough to do the basics on, and for most people, it barely stretches to that, if we’re honest.
It is vitally important that you look to supplement your state pension for this reason, otherwise you really will find yourself with a poor standard of living when you retire. You didn’t work all those years to struggle! Remember, a state pension is just enough to live on (just), but it is certainly not enough to allow you any flexibility or any room for luxuries.
When you have spent 60 odd years working, surely you deserve the odd luxury here and there! You also don’t want to be worrying about where the next penny is coming from, not when you have worked so hard, for so long.
For this reason, pensions are a must do. It’s not a good enough excuse to put them on the back burner because you don’t really understand them, or you think retirement is just too far way. The time will come, and you will want to look back and see that you made a good decision, not a poor one, or no decision at all.
Pension rules change on a regular basis, due to pension companies making changes, and the Government making changes too. It is impossible for the regular person to stay up to date with these changes, and totally understand them.
This is one reason why financial advice will work very well for you. By seeking help, you will be privy to the very latest developments, without having to scroll through endless financial jargon trying to make light of it yourself.
Most youngsters put off pension talk for far too long, and if you are a parent reading this, you should certainly be imparting some words of wisdom towards your children, whether they listen or not! Retirement seems so far off, something that will never happen to us, but it creeps up faster than you would realise.
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Choosing Your Pension
Put simply, there are three main types of pension scheme:
• State pension
• Private pension
• Company pension
You can choose to have just one of these (not advisable for most people), two, or you can have all three. Three is obviously the best option, but you are going to be paying more of your salary into it every month. It is a personal decision that you need to weigh up for yourself. It’s no good being out of pocket every month throughout your working life, but you do need to find a happy balance, to ensure you’re comfortable in both states - working and not working.
A state pension is, as we mentioned before, the Government pension which you will receive when you reach retirement age. This is what you pay your ‘stamp’ for every month, which will automatically be taken from your wages, via your National Insurance contributions, assuming you are earning enough for NI contributions to be deducted.
Whether you receive full pension or not depends entirely on whether you managed to accrue enough contributions throughout your working life. For this reason, many people choose to continue paying their ‘stamp’ even when they are not earning enough for regular NI contributions. You can do this by contacting your local tax office and arranging for these contributions to be paid via your bank, or by a one off payment every year - it depends how you prefer to go about it.
As we mentioned, the state pension is enough to scrape by on, but it’s certainly not going to line your savings nest in any way. For that reason, supplementing this is a good idea.
A private pension scheme is a choice you can look into, and this means taking out a pension policy with a private company, and paying it into it every month. The amount agreed will be taken out of your bank account on a set date, usually through a Direct Debit agreement. This will then accrue over your working years and pay out when you retire.
Some private pension schemes allow for a lump sum upon retirement, and then a fixed amount to be paid each week/month thereafter. This is something you should look into, as a fixed sum upon retirement is a very nice bonus indeed!
Shopping around when looking for a private pension scheme is vital, and again, this is something a financial adviser can help you do. Making the wrong decision here could leave you very short in the future. There are also some unscrupulous companies out there who live to make a profit scamming people out of their money. If you are not sure about a company, do not agree to anything. Again, financial advisers can help you to side-step any potential issue such as this.
There are regulatory bodies which pension companies need to be registered with, and this is a bare minimum requirement. If they can’t show you proof of this registration, or the papers they show you don’t look particularly official, the chances are they are not offering you the best possible investment.
That leaves us with company based pension schemes. Most large organisations will offer a pension scheme for their employees, and it is a good idea to take them up on it. For instance, the NHS offers a very good pension scheme, with the employer paying a large amount of contributions every month, and the employee paying a smaller amount, which is directly deducted from their wages at source.
Upon retirement, this scheme pays out a healthy amount per month, and is a good option for employees working in that field. This can be taken at the same time as a state pension.
Of course, many other companies offer the same sort of pension scheme, and you will be given the choice to opt out at any time, having been automatically enrolled within the scheme at the time of your employment commencing. To opt out isn’t a good idea; if you find a good company based pension scheme, it’s best to stay in it for the duration of your employment. After that, you can choose to freeze your pension contributions and have them transferred to your new company.
Again, this is something a financial adviser can give you help on, and ensure that you don’t lose out at any stage of the process. It’s about making your money work for you, so you have more when you retire, and you’re not struggling in the meantime.
Once you’ve identified your personal pension choices, and you’ve paid into it for a few years, or decades, it’s not a good idea to simply let it go on without occasionally stopping to review it all. How do you know if you’re getting the best deal? How do you know that you can’t get a better choice somewhere else?
These are things which a financial adviser is on hand to help you with. He or she will know all the best options available to you, and after reviewing your particular circumstances, they can give you the choices that you might like to take.
You can easily switch from one to another, with the help of your pension adviser leading the way. If you attempt to do it yourself, how do you know you’re making the right decision?
Here at Edinburgh IFA, we discovered that those who are 45 years or older who don’t have a regular financial review, could be losing out on around £157,500 on their overall pension. That’s a huge amount of cash to let go!
By having an independent financial review from time to time, you can identify the best new routes to go down, and that could bring you up to another £7000 per year during your retirement, as an average figure. During your retirement an extra £7000 every year will go a long way indeed, so it’s certainly worth sitting down and having a chat, looking over your current state of affairs and seeing if anything can be tweaked and changed. If it can, you can easily make a switch, and if it can’t, you can stick with where you are for a little while longer, and check again in a year or so.
Understanding Pension Products
Perhaps the number one reason why many people seek out independent financial advice regarding pensions is because pension products overall are quite complicated. You are talking about a long-term investment, something which it’s going to bring you rewards until many years down the line. Looking that far ahead takes some practice, and if you don’t have the financial know-how, and most people don’t, then how are you expected to make the right decisions?
Every single pension product and policy is different to another. The only constant is the state pension, and even that can get tricky and complicated from time to time!
There is enough worry and anxiety about retirement as it is, you don’t need to be adding to it by not really understanding your pension, what it is going to give you, and what it isn’t going to give you.
You could compare pensions loosely to insurance policies, and we all know how difficult understand they can be. There are loopholes and small pieces of print at every corner, and if you miss even one tiny detail, you’re probably not going to be covered.
Pensions are similar in that there are many terms and conditions to take into consideration, and because we are talking about your livelihood when you decide to stop working, it’s so vitally important to make sure that you make the right decision, and that the policy you choose continues to work for you as the years go by.
It’s likely that it won’t at some point, and then you will need to switch - again, your pension review will identify that, and your financial adviser will be able to show you the way towards a better product for your needs.
New Rules, New Advice
Pension rules change on a regular basis, and there has been a big change over the last few years, coming into effect in April 2015.
Prior to April 2015, once you had taken the cash which was eligible to be tax-free from your pension pot (the amount of cash you have saved up in your pension scheme for retirement), then the rest of the cash left over had to be used to buy something called an annuity.
This annuity would then guarantee you enough cash every month until you died. Following this change, you now have total flexibility over how you use the cash in your pot, which might be a good thing in some ways, but it also brings up a myriad of different decisions to think about and make. How can you be sure you’re making the right choice? Do you even know about all the options available to you?
The most sensible thing you can do here, prior to your retirement, is to discuss your options with a financial adviser. It can be very confusing at this point, because you have a big life change coming up, and of course you want to be secure for the duration of time you’re enjoying it. If you don’t take financial advice for any other reason, make sure it’s for this one, because this is your life and your livelihood at stake if you make the wrong choice, based on lack of information to hand.
Of course, it could be that you know what you want to do, but it is never a bad idea to get your plan checked out by an adviser, to check there are no loopholes and pitfalls that might be coming your way sooner than you realise.
Knowing When You Can Afford to Retire
The biggest decision to make regarding retirement is when to do it. Most people are never 100% sure it’s the time, because it’s such a daunting thought; what if you don’t have enough to survive on? What if you should have stayed on for a couple more years, and you made the wrong choice? These ‘what ifs’ can cause you more anxiety than you will realise at the time.
In this situation, a financial adviser will be able to look your current state of financial affairs, including any savings you have, and then look into your pension pot. This pot will have all the cash in it which is yours for your retirement years.
Your adviser will be able to tell you honestly whether you have enough cash there to retire on or not. Whether you take this advice or not is up to you, but it is based on professional training and experience, so it’s strongly advisable that you do!
At this review, your adviser will also be able to work out what your state pension is going to look like, and when added to your private or work pension scheme forecasts, you will have a total overview of how well off or otherwise you can expect to be during your retirement, if you choose to retire at that point or not.
Making this very important decision correctly requires knowledge beforehand.
Your Financial Adviser is There to Help
We’ve talked about a lot of different issues pertaining to pensions over the course of this article, and with all of this in mind, it’s no wonder that so many people find pensions to be a total mystery.
It’s so important to get the decision right when you choose which pension to go with, it’s equally as important to have regular reviews, and don’t be scared to move things around if you need to, and it’s even more vital to make the decision to retire at the right time, at the most sensible time for you financially.
How are you supposed to know all of this simply off the top of your head? You can’t!
A financial adviser has years of experience and knowledge, whilst staying totally on top of the latest developments in the pension world. There is unlikely to be one speck of detail that they don’t know. For that reason alone, a financial adviser is the number one source of help you should seek out when pension talk time comes around.
You should make your pension a priority in your life from the moment you start work, no matter how young you are, and it should be something you revisit periodically over your working life.
When retirement begins to loom on the horizon, your thoughts should turn more towards what you want when you retire, and how you’re going to afford it. All of this can be discussed with a financial adviser, who has only your best interests at heart.
Many people wrongly think that a financial adviser is something which wealthy people have, and that they can’t afford such a luxury. Financial advice should never be considered a luxury, it should be a necessity, in order for you to live your best life possible. Financial advice is not something to break the bank, that would be a total contradiction of what it is for!
A high quality financial adviser will be able to help you find the ideal pension scheme for you, one which is going to see that you’re not struggling to make ends meet during your working life, and that when you do take the decision to retire, you can enjoy your retirement years, doing all the thing you planned, without having to worry endlessly about money.
Your pension should tick the following boxes:
• Work hard for you, to accrue as much as possible for your retirement years
• Be affordable whilst you’re working, and not overstretch your funds
• Be tailored to your particular needs and wants, both before and after retirement
• Stay up to date with all developments and meet guidelines
• Offer you flexibility, in terms of lump sum options and being able to transfer pension contributions from other ‘pots’
• Supplement your state pension, to create a comfortable lifestyle after retirement
Finding a product to tick these boxes easily can be difficult, but your financial adviser will be able to do that for you with ease.
Pensions are confusing enough, without trying to deal with it all on your own. Don’t leave yourself in the dark, heightening the temptation to simply not bother with a pension at all. That would be the biggest mistake you could possibly make in your life.
If you’re living in Scotland and are in need of pension advice, don’t hesitate to give us a call to arrange a free consultation. We can help team you up with your ideal personal financial adviser, who can then give you all the information you need to find you the best pension policy for you.
If you already have a pension, we’re more than happy to review it and see if it needs to be changed, or whether you’re good to go. Equally, if you’re totally confused about pensions and you really don’t know which way to turn, we urge you to call us as soon as you can; there’s no need to be worried and worked up about pensions, and if you allow the experts to work it all out for you, the pressure will be off, leaving you to look forward to a healthy and happy retirement period of your life.