Updated 12 February 2021
Your pension is literally a lifetime’s work – a marathon, not a sprint. From setting it up to building up savings and finally drawing an income, there are many elements to consider at every stage of your adult life. Most of us only get one shot at planning for our retirement, and it’s not simple or easy – which is why financial advice can be so crucial in getting it right.
Here we explore the reasons why it’s important to use an IFA both when planning your pension and choosing your pension options.
If you’re an employee (i.e. not self-employed or unemployed) then you’ll be enrolled automatically in a workplace pension. You won’t need pension advice for this, although if you’re a high earner it can still be usefully in choosing the right fund. Also if you’ve got a public sector pension, such as an NHS pension, it’s also worth seeking advice from a professional to help you make the most of it and avoid certain pitfalls.
However, if you don’t have a workplace pension, you’ll probably need your own personal pension scheme unless you plan to rely on your partner’s pension in retirement (which is a risk, especially if the relationship breaks down). The state pension alone is generally not enough income for most people to live on.
You can set up a personal pension scheme without advice. However, there are very good reasons for talking to an independent financial adviser about it, including:
You can go DIY, or turn to an expert for management help. If you choose the DIY route, then you’ll probably be looking at either a stakeholder pension or a self-invested personal pension (SIPP), the latter of which is a pension where you get to choose the individual investments that go into it. Here you may need an adviser to pick the best funds and grow your pension faster and with greater security.
Good reasons to get expert financial advice for managing your pension include:
There are at least two ways you might ‘transfer a pension’, so it’s important to be clear first which one you mean. Transferring a pension can mean:
This kind of pension transfer means trading in a defined benefit (final salary) workplace pension for a pension pot of broadly equivalent value, i.e. a ‘defined contribution’ or money purchase pension. This is something for which advice is almost always necessary.
If the pension you wish to transfer has a transfer value of £30,000 or more, then the law requires you to take financial advice first. Moreover, this isn’t just a box-ticking exercise – your IFA won’t simply sign a letter allowing you to transfer, and will charge you for full advice. This may be relatively costly. The reason for this is that by advising you to transfer, the IFA takes on liability and risk if the decision turns out to be a poor one. For example, the stock market might crash soon after your transfer, wiping out much of your pension pot. Or you might unwittingly draw out too much and deplete the pot too soon. As a regulated adviser, the IFA is responsible for the advice they give, which is why they won’t simply wave your decision through. Remember that this is a good thing, and ultimately for your protection.
You can move a pension pot from one scheme to another, such as when moving jobs and getting a new workplace pension, or when combining several pensions into one (pension consolidation). In this case there are some key questions you should ask providers or your financial adviser.
Cashing in a pension, i.e. withdrawing the whole amount as a lump sum, is not generally recommended except when a pot is very small. The whole pot will count as income for that year, and be subject to income tax accordingly – it may even push you into a higher tax band and face 40% tax or more. This kind of hit may often cancel out the whole benefit of having a pension at all (tax-free saving), so it’s hard to see why a person would want to do this except in a financial emergency.
If your defined contribution pension has a guaranteed annuity rate attached to it (which guarantees the amount of income you are entitled to when you retire), then it’s a legal requirement to seek financial advice before cashing it in if it’s worth £30,000 or more. Advice is highly recommended in any case, for the reasons given above.
Similarly, you can’t ‘cash in’ a defined benefit pension without taking financial advice. In most cases, the guaranteed income of the pension will be preferable to a non-guaranteed finite lump sum.
Although it’s not a legal requirement to consult an IFA when accessing your pension, this is probably the single most important time in your life to seek financial advice. The decisions you make when you start to draw your pension may have implications for the next 20-30 years, and the sums of money at stake may run into hundreds of thousands of pounds. Given the importance of the decisions you will be making, it is therefore prudent to seek expert advice at this point – just as you would use a solicitor when buying a home.
For example, if you are considering buying an annuity, you will need to think about the type you want. Basic lifetime annuities fix your income from the start, where investment-linked versions are affected by the performance of underlying investments, so income goes up and down. Also, annuity rates are influenced by your health and age. A financial adviser can help you find the right product and the best rates, sometimes making a difference of many thousands of pounds across the course of your retirement.
If you want to take out a drawdown scheme then financial advice is equally crucial. Your adviser will help you choose the most suitable fund, will set it up for you, and will advise you on how much to take out of your pension pot without compromising it, ensuring your income’s sustainability.
There’s so much choice and flexibility for accessing your pension today, but this freedom also brings more responsibility and added risk. An IFA can help you make the most of your investments and keep them secure. Through expert knowledge of legislation and regulations, they can also keep you up to date with changing pension rules.
Research published by Royal London shows that consulting an IFA will generally make you wealthier in retirement over the long term. In this sense, the net cost of advice is negative.
To discover how a financial adviser could assist you with retirement planning, you can start by trying a free pension review. A qualified IFA will look at your pension arrangements and give you an unbiased assessment, so you can decide whether or not you want to proceed with pension advice. The consultation is free and without obligation, but if you do decide to go on to take paid advice, you’ll get a £50 discount.
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