SBA Financial - Solving the financial puzzle... ...piece by piece

Monthly Update - February 2010

Is a pension really the best way?

So is a pension really the best way to save for your retirement? The short answer is yes and no! It really depends on what type of pension we are talking about and what you want out of your retirement.

I am a great advocate for forward planning, but I am not a fan of pensions and in particular I am not a fan of personal pensions! There are some really good pension schemes available, but likewise, there are also some pretty poor pensions around, so how do you know what falls into the good category and what falls into the not so good category?

Well, if you are an active member of a Defined Benefits Pension, often also referred to as a Final Salary Scheme then these schemes are generally really great and very good for the members who have access to them.

If you are an active member of or have access to a Defined Contribution often called a Money Purchase Scheme then these are not generally as great as a Final Salary Scheme, but they are still very worthwhile in most cases, particularly when your employer is giving a large contribution into your pension for you.

One thing you can't escape from with any pension is the fact that they are very inflexible. Which is why I am not a fan of personal pensions, because they come with none of the benefits of a Final Salary or Defined Contribution Scheme, they just have all the inflexibility and rules that dictate what you can and can’t do with your pension. So regardless of the type of pension you have, you do have to accept that this may well not be the best method of saving for your retirement, if you need something more flexible.

When you are saving your money personally, into a pension, you have to look long and hard at this and ask yourself, who is it really benefiting? Imagine if the government and pension companies had to tell you the TRUTH about pensions, they would probably say something like this:

“Listen, I have this savings plan would you like one? What happens is you go to work and earn some money and we will take lots of it away from you in income tax and national insurance, but if you put some of what is left into a pension, we will give some of the tax back to you by adding it into your pension. However, the catch is, because we gave you some of your money back, we can now tell you what you can and can’t do with it and by the way when we do let you have your money, we want you to pay tax on it. Plus, if you die early we want to get even more money, if we can! But don’t worry, if you don’t die early, and then fall ill and need long term care we will still want some of it back to help pay for your care fees!

You ask “is there anything else I should know?”

The reply comes: “Well yes, there are lots of rules that we have not covered and we will keep changing the rules and moving the goal posts, but don’t worry because we will make it so confusing you won’t be able to keep track of what’s happening anyway. It’s called a Pension would you like one?”

Of course, if they explained it in this way you may well say no thanks; I will keep my money with me. But of course they don’t tell it like this; they go on about how tax efficient it is and how important it is that you have a pension.

However, having said all that, the real TRUTH of the matter is that saving and planning for your retirement in any form, is 100% better than making no forward planning and not saving for your retirement at all!

Alternatives to Pensions

As I have already said yes we all should plan for our future needs but there are alternatives to pensions and the choice is huge, including: PEP’s , ISA’s Commercial Property, Residential Property, Overseas Property, Unit Trust’s, Bonds, Stocks & Shares, Art, Fine Wine, National Savings, Cash, VCT’s and CFD’s etc. This list is almost as big as your imagination and a good rule to remember is never put all of your eggs in one basket, so a mix of various saving methods is normally the best way to achieve your financial independence. Here is the key to successful retirement planning it is a six step process.

Step 1: Find yourself a Professional Independent Financial Advisor (IFA).

Step 2: Decide with your IFA what you want for your future and what that will cost.

Step 3: They then should decide with you what your attitude to investment risk is.

Step 4: Next they need to formulate an investment strategy that fits your risk profile.

Step 5: Now it’s time to decide on what products to have in your plan.

Step 6: Make sure that your plan is regularly reviewed with your IFA.

Please remember products come last, people come first! You must make sure that it is clear what you what to achieve, when you want to achieve it by and what risk you are prepared to take, before any mention of products or market research takes place.

How to increase your pensions without paying more into them

Ok, but what if you already have pensions? Well the best you can do is to make sure that they are doing the best that they can for you. They may be inflexible, but what’s done is done, so now we want them to grow as much as they can.

There are three major ways that you can really boost your pension funds without putting any more money into them.

Charges: There is a massive difference between the lowest charged pension fund and the highest. Clearly if you are paying high charges then your fund will be affected. I am not saying the cheapest is the best, as often cheap, gets you a cheap result, but like most things in life there is a balance between cheap and expensive, where you also get good quality and value for money.

Performance: Having the right Investment Strategy with professional advice in selecting the best investment choices, assets allocation and funds, along with regular reviews, will help give you a chance to make your money grow much better and as with charges there is a massive difference between the best performing investment funds and the worst.

Taxation: This means making sure that you build and then take your pension benefits in the most tax efficient way for you.

The most effective way to invest the money in your pension

First, let’s remember that your plan should be individual to you, what you want, when you want it and what investment risk you are prepared to take. However, here are some golden rules to remember:

Spread the risk don’t put all your eggs in one basket
Typically have at least 12 funds in the portfolio
Consider other investments, many different assets can be held in pensions now
Bank the gains by rebalancing your portfolio regularly
Regular savings must be invested differently from lump sums
Have regular reviews. Your advisor should be reviewing your pension each quarter and then with you once a year.

How to reduce your pension charges

This can make a massive difference to your pension fund. There are literally thousands of pensions, from many different pension companies, all with different charging rates. Some pension contracts are very old and some are more modern. In particular, a big difference between new and old pension contracts is often charges. Because charges have come down a lot over the last decade, more often than not, with an older style pension contract, you could be paying way over the odds.

There is only one way you can be sure that you are getting good value for money and that is by having a detailed Transfer Value Analysis Report completed on your pension funds by a qualified professional IFA.

Two words of warning here; first, only an IFA can do this as they have access to the whole market place. Banks and tied advisors represent and sell their employer’s products only, so they can't give truly independent advice. Secondly, expect to pay a fee for this report. They say there is no such thing as a free lunch and I truly believe this. If a service is offered for free even by a true IFA how can you be sure that the advice will not be biased by a desire to transfer your pension so they can be paid a commission?

How to pay less tax on your pension

There are three parts to this. The first part is making sure that you are getting the right level of tax relief on money going into your pension. You only get automatic basic rate tax relief on pension contributions, higher rate tax payers have to claim the rest via their tax returns. The next part is to use Salary Sacrifice to make payments via your employer, because you save National Insurance. Finally, you need to make sure you take the benefits in the most tax efficient way when you retire. Always make use of your tax free cash lump sum entitlements, but also in some cases Phased Retirement or Income Drawdown can save thousands of pounds in tax

How to protect your pensions if you die before you retire

This can be a massive problem and of course the big problem with the future is that none of us knows what might happen, but that does not mean that we can’t plan for the unexpected. The sad fact is that some of you reading this will not make it to retirement, so along with all your worldly goods, your pension fund will pass to who you have nominated in your will. This may be your spouse or partner, but could be others such as children etc.

For the purpose of this example we will assume you have worked hard and saved hard and you have now built up a pension pot of £500,000 and are looking forward to your well earned retirement with your spouse or civil partner. You have a couple of children and maybe even grandchildren. Unexpectedly you then die, but at least your spouse or partner will be ok for money, because they have your pension pot and all your other assets. Or will they?

So your spouse is now the legal owner of your pension pot worth £500,000, this means any number of people or authorities can steal it away from them. Just one example is what happens if your spouse or partner remarries? The new relationship may work out, but it could end in divorce and then your £500,000 is going to be included in a divorce settlement. Of course the new relationship may work out just fine but then your spouse or partner could die and then who is going to get the pot? Your children? Or your spouse’s new widow or widower?

Your spouse may find themselves in financial difficulty in the future and maybe even go bankrupt, so who is going to get their hands on your pension pot now? Or they may need long term care and the local authorities will want to get their hands on it. Of course none of these things may happen but that’s the point we don t know what the future holds.

The solution is to place your pension into its own trust. This will effectively ring fence the £500,000 so that it is protected from all of these possible attacks on it. This way you can make sure that the right money goes to the right people, at the right time and stays there. You do have to be careful and ensure that you use the right type of trust; if you don’t the results can be every bit as bad as not using a trust at all.

Taking your Pension Benefits

Deciding on the best way to take your pension benefits is in many ways more complex than deciding the best way to save for your retirement and if you get it wrong you are often stuck with the decision for the rest of your life. This subject alone could easily cover an entire newsletter and you need to ask many questions before taking this critical decision.

The main point that should be considered is taking professional Independent Advice. Do not rush the decision, the financial advisor should take the time to explain all the options available to you, along with the positives and negatives of each option, so you can make an informed decision about what you feel is right for you. Just some of the options to consider are:

Annuities (there are several types and options)
Open Market Option - this is the option, which allows you to search the market place for the best annuity available.
Unsecured Pension, also known as Draw Down
Phased Retirement
Third way products
A mixture of some or all of these

We hope that one or two of these tips were helpful to you? For more information, click here to reserve yourself a place at our “The Truth About Pension’s” Seminar on the 30th March at Cams Hall, Fareham.

Also, there are a few remaining places at our first seminar for 2010, which is called “The Truth About Wills, Trusts & Estate Planning” on the 23rd February, for more information about this and all our other seminars for 2010, please click here.

Finally, please don’t keep this a secret! Share our E-Newsletter with all your family, friends and work colleges.

Kind Regards

Steve

Previous articles