Updated 03 December 2020
If you think life is looking more and more like Tales of the Unexpected, don’t despair. It’s still possible to take control of your own future – by understanding how pension freedom works. Ian Hartley, financial planning consultant with Armstrong Watson, shares some power tips.
They say predicting the future is a mug’s game. They have a point. Just a couple of months ago, if I’d suggested there would be a June General Election, you’d have laughed at me. Yet when Theresa May did announce the snap election, both the markets and the pound (which are supposed to hate this kind of uncertainty) reacted positively. In this strange new unpredictable world, who would be confident enough to try financial planning? And how could you know if you were getting value for money?
Having been a financial adviser for a number of years, I’ve noticed that my clients have been getting savvier. They are now much more aware of the need to seek out financial planning advice, have become better informed, and are highly focused on getting real value.
However financial advice is a bit like gardening – in that the results often aren’t immediate, and indeed may take years to come to fruition. Additionally, there may be ‘bad weather’ (e.g. unforeseeable events) along the way that may affect the outcome. Nevertheless, even if you can’t predict the future, you can effectively prepare for it. So it seemed like a good time to share my best tips on long-term pension planning – come what may.
1. Plan in advance
Since the introduction of pension freedom, many more of my clients have wanted to explore the wider options now available. The new flexibilities do have a strong appeal, especially for those clients looking to repay debts, buy something special, or just bring forward their retirement.
But what concerns many of these clients is the process involved, the advice they may need in their specific circumstances, and how much this might cost them. Pension freedom is a simple idea, but the practicalities for each person can quickly become very complicated. Anyone wishing to access their pension pot should consider their options carefully, as there can be many pitfalls.
When I assess a client’s circumstances and goals, I take a number of points into account. There are some scenarios that may certain choices less attractive than they first appeared – or even counter-productive. That’s why it’s so important to discuss these thoroughly with an adviser first.
2. Watch out for income tax
Here’s an example of a downside of taking pension benefits without proper planning. Taking too much from your pension pot at once could trigger a significant tax bill, particularly if you already receive other forms of income, such as a State Pension. Too big a withdrawal could even push you into a higher tax band, negating much of the benefit of taking out the money.
3. Be aware of allowances and thresholds
Accessing your pension could also have a knock-on effect if you want to consider paying more into your pension in the future (as it can greatly reduce the amount you can pay in each year). Similarly, anyone in receipt of state benefits could find these too are affected.
There are a number of allowances and thresholds linked to pension accumulation and decumulation, and exceeding them could unwittingly trigger a tax charge. It’s therefore important to know the rules and limits before you take any action.
4. Assess and compare all your options
Never forget you have a choice of how you access your pension pot. Look into each scenario carefully, with an adviser who can explain to you the pros and cons, and how they might work in different life circumstances.
It also pays to do the research and ensure that you choose the most suitable product and provider. Not all providers offer the same options, so use an adviser who can identify the best choice for you from the whole of the market.
5. Look beyond your own life
The rules governing what happens to pension funds on death has also been overhauled. This means it’s worth reviewing the expression of wish or any nominations you have in place with your provider, to ensure that these meet with your wishes. There is now much more scope for your beneficiaries to inherit money from your pension, so factor this into your plans.
6. Review your plans regularly
Pension regulations are subject to continuous changes and updates, and your own life and plans may change too over time. This makes it doubly important to review your pension arrangements regularly to ensure that they are still fit for purpose – and to see whether you could improve them. Like that garden I mentioned earlier, with regular tending your pension should be able to provide you with the retirement lifestyle you desire.
7. Remember: you are unique
There is no one-size-fits-all solution when it comes to financial planning. By its very nature, it’s personal to every individual. Bespoke financial planning can ensure that you make the right decisions for yourself, not someone else, and that they suit you not just today but long into the future. Also (as with buying a house) it’s important to look beyond any short-term costs or savings at the long-term benefits. As the saying goes, you usually get what you pay for.
When I watch Dragons Den, it frustrates me when the entrepreneur walks away from a deal because the Dragon is asking for, say, 40 per cent of the business. What they don’t see is that a Dragon’s help is likely to make them far more successful, even with their smaller share, than they could ever be on their own. Financial advice can be a bit like that – an up-front cost, in exchange for much greater prosperity further down the line.
So if you have a plan for retirement in mind, the first thing to do is run it past an independent financial adviser. They can consider every aspect of your circumstances and see if it really is best suited to you needs, to give you genuine peace of mind. Just don’t be surprised if your ideal solution turns out to be completely different from the one you expected!
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Ian Hartley is a financial planning consultant with Armstrong Watson, based in Carlisle. He has over 20 years’ experience and is a Diploma qualified financial adviser studying towards Chartered status.
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