There will be thousands of people contemplating retirement this year and that number is growing every year. In 1901 there were 10 working people for every pensioner. But this reduced to 3 working people in 2010 and is set to reduce to just 2 by 2050. It doesn’t take a genius to work out that reliance on the state will disappear. However, many people lack faith in private pensions and quite rightly so. It’s time to start asking different questions.
The average value of a pension pot in the UK is about £30,000. There are some people who have accrued much larger pots and have greater opportunities available. £150,000 is a realistic minimum for those considering more sophisticated retirement strategies. These options extend to phased retirement, capped and flexible drawdown. But they are far from straightforward, hence the involvement of independent financial advice.
There is no doubt pensions are over-complicated and difficult for consumers to understand. They are riddled with rules that seem to benefit the government and the financial services industry but not the customer.
Regardless which political party is in Government they have a vested interest to promote pensions to the public. Accrued pension pots are subject to income tax and a very useful source of revenue for the Government. Normally, a lump sum of 25 per cent is paid at retirement but the balance will be added to other income and taxed accordingly. For this reason pensions should be treated with caution, especially if tax relief is clawed back as income tax later on. But pensions can be very profitable if used in the right circumstances. Targeted planning is required to ensure tax relief and tax free growth is greater than what is lost when benefits are taken.
Dealing with the financial services industry is another matter entirely. Wealth managers and private banks have literally made a career out of selling dodgy pensions to the public. The main problem has been charges and commission but risk and poor management decisions are key issues too. Another factor which affects everyone is poor gilt yields which drive the level of income taken at retirement. It doesn’t sound like great news for pensioners so the need to make good investment decisions becomes even more crucial.
A wise decision would be to separate hard facts from opinion. I think everyone would agree that pensions are very complicated but equally, they are a set of rules. Both consumers and professional advisers must abide by them and work within their parameters, they are known quantities. Skilled and knowledgeable advice is subjective, and difficult to find, so too is investment expertise.
For those with an average pension pots, securing a good annuity is the main focus. But investors with accumulated funds over £150,000, expert advice will be required for many years ahead. There is simply too much at stake when considering phased retirement and income drawdown. These methods of retirement planning harmonises tax efficiency, risk control and investment expertise. Cost and charges should be carefully considered, particularly because they erode investment returns.
So what should people do when they have accrued a large pension pot? Well, this depends on how much work investors are willing to do. It is far quicker to act upon instruction by accepting the advice and hope they get it right. Alternatively, you could do the homework and select an adviser who satisfies key criteria. Bad advice is something no one seeks to find but is usually discovered after the event, causing stress and perhaps financial loss. I have written a blog called ‘The Niagara Syndrome’ which is designed to help investors who are concerned about selecting the right kind of adviser.
Remember, talk is cheap and there is no shortage of wealth managers and private banks giving advice. The only challenge for the investor is finding the right adviser and can only be achieved by asking the right questions first. In doing so, matters of pensions, tax, investment and risk will take care of themselves.