Pension Awareness Day: not quite Christmas but still a great gift
Despite still being in the throes of Summer, my son is already hankering for Christmas (he wants a Nintendo – he’s four!).
I’ve told him he’ll need to be patient for now and make the most of another equally exciting day that’s just on the horizon…
I can admit it’s a bit of a tall order. Even IFAs don’t have September 15th circled on their calendars, but Pension Awareness Day isn’t far off, and it’s a timely reminder for those who aren’t giving pensions the attention they deserve.
The organisers of Pension Awareness Day are running a series of webinars to remind everyone why pensions are important and things they need to consider.
We recommend taking a look. Because pensions are important. Hugely important. Even those with some pension provision already in place leave valuable tax benefits on the table, or take risks that can cost significant amounts of money.
Pension Awareness Day might not be as fun as Christmas Day but optimising your pension is a gift to yourself. The gift of a comfortable, happy, and well-deserved retirement.
So, if you’re brushing up before the webinars, here are four things you need to know:
One: It matters where your pension is invested
Just having a pension or two and getting on with your life isn’t enough. Many people that approach us for advice already have pensions but have no idea how they’re invested. And that’s not a good place to be.
The money in your pension pot is usually invested in shares, bonds, cash or a combination of all three. If you don’t have some sense of how your portfolio is balanced, you won’t know if you’re taking too much (or too little) risk, paying needlessly high charges, or just letting your money sit in old funds that aren’t performing.
And if you’ve become more ethically minded in recent years, it’s unlikely your old pensions will reflect those values.
All of these things can have a knock-on effect on the level of income you’ll receive from your pension, and on the timeline for being able to safely draw funds.
Keeping a close eye on where your pension pot can be the difference between a comfortable early retirement, or having to work well past your prime.
Two: Your pension isn’t just about retirement
For many, pensions aren’t a priority until they wake up one day at age 53 in a cold sweat, worried that they’ve not put enough away.
And at age 33 or 43, there’s less sense of panic. Pensions are for twenty, thirty years in the future. Who’s got time to focus on that now?
It’s well worth making time. Because whether you’re a business owner or an employee, getting a handle on your pension strategy will pay off for you now, not just in the future. Pension contributions attract valuable tax relief, which both boosts the value of your fund, and reduces your income tax bill (or your company’s corporation tax bill).
Depending on circumstances, you can invest up to £40,000 into your pension each year. If you’ve not maximised contributions in the past, you can even bring forward some of that unused allowance from previous years.
It’s all a bit complicated, and you’ll want expert advice, but investing in pensions can be the best thing you can do to reduce your tax bill.
If you’re already doing this, then great. Just remember to claim back your higher rate tax relief via a tax return.
Three: You need to think about how to access your pension
Maybe you’re nodding along as you read. You know exactly where your money’s invested, and you’re maximising contributions to reduce your tax bills.
But do you know how you’ll access your pension when you retire?
The traditional way to draw your pension is to use the fund to buy an annuity. Effectively, you swap your pension pot for a fixed lifetime income. Generally speaking, once you’re gone, so is the pension. But that’s not the only option.
Flexi-Access Drawdown (FAD) is a more common modern option. With this method, your money stays invested your pension pot, you take out as much or as little as you need, and anything that’s left can be passed on to your beneficiaries. This takes some careful management though, to make sure you don’t empty the pot too quickly.
And some people choose not to draw from their pension at all. If you’ve built up a range of assets to support yourself in retirement, you might decide to leave your pension untouched. Those funds aren’t subject to Inheritance Tax, so it’s an efficient way to pass on assets to your loved ones.
Deciding how you want to access your pension is important, as it’ll impact how your pension fund is invested. If you want an annuity, for example, you’ll want your pension in less volatile funds to prevent any last-minute swings in value.
A good financial advisor will help you see the pros and cons, but it’s another decision you’ll need to think about and make.
Four: Consolidation helps
It’s unlikely you’ll have stayed at one job from your teenage years up until retirement. Most of us have various pension pots from different employers (or different periods of self-employment).
And most forget about them. That means those pensions could be invested in unsuitable ways, or you might have to dig out four or five sets of statements and logins. It’s a faff.
Which is why many of our clients decide the easiest and most efficient thing to do is consolidate. All pensions merged into one pot, with one login, and complete control over how money is invested and drawn from.
Again, expert advice is required here to make sure you’re not giving up any unique benefits, but consolidation can save lots of time both now and further down the line.
Hopefully you’ll now be giving your pension(s) a little more thought. If you have any questions at all about giving yourself the gift of a comfortable retirement, you can drop us a line on 020 8323 8881.
Now go and enjoy Pension Awareness Day on September 15!
Thanks for reading.
Simon
The legal bit:
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount you invested. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.