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Michelle Boakes talks us through the different types of pensions and how they work.
What are my pension options?
There are so many, and it really does depend on the type of pension that you have. You’ll either have something called a defined benefit pension or a money purchase pension.
A defined benefit pension is usually set up by an employer, and when you reach your selected retirement age you will get a guaranteed income for the rest of your life. It is all based on your salary and the amount of time you’re with that employer.
A money purchase pension is one where you, and possibly your employer, contribute money and it grows a fund. When you decide that you want to retire you’ll have a certain amount of money. You can then decide how you’re going to take the benefits: whether you take a regular income or withdraw lump sums here and there.
It depends on the provider as well. In 2015 the government introduced something called Pension Freedoms and dramatically changed the legislation on pensions. But not every provider took up the freedoms that they were able to offer.
You really need to investigate the type of policy that you’ve got, firstly, and the options your provider allows. For example, Flexi Access Drawdown isn’t available on a lot of older pensions. Something else to check is whether your pension has any valuable benefits like guaranteed annuity rates.
So because there are so many different options and different providers, it can be quite complicated.
How can I access my pension and savings?
That’s probably the biggest question we get when people are reaching an age where they start thinking about what they might like to do in retirement, or when it might be possible for them to retire.
A lot of people come to me with traditional pensions in mind. Before 2015, when pension freedoms were introduced, the main way to use your pension was for it to give you an income. The norm was to make an annuity purchase, where you give the fund you’ve saved over to an insurance company, and they provide you with a guaranteed income for life.
You’d have options on how to set up that income – it could pay out the same amount for the rest of your life, or it can increase in line with inflation or another percentage. You can also provide for your spouse or partner in the event that you pass away before them, and you can also add certain guarantees.
A lot of people are under the impression that this is how they will have to take their pension, but there are a few other options as well. I mentioned flexi access drawdown earlier, and I tend to think of this like a barrel of money. You can take out what you decide you need every month or every year, or you can take out a lump sum as you need it. You can keep taking the money inside that barrel until it’s empty.
If you pass away with money still inside your barrel you can pass it on to your chosen beneficiaries – your spouse or your children. It can be passed along the generations until it’s empty.
There are a few other options as well. I’m sure most people have heard that you can take out your entire pension funds in one go. That’s something called an uncrystallised fund pension. Taking all your money out means there are some tax consequences, so it’s really important that you get advice if that’s something you want to do.
How do I know what my current pension plan is?
The first step is to look at your annual statement – and in fact a lot of providers now give online accounts to their clients. So you can either go online or have a look at the annual statement that they send you. That should give you a clear indication of whether you have a money purchase plan or a defined benefits scheme.
You can also ask your employer, if it’s one that they’ve set up for you. You can also contact the provider of the pensions. Your statement might come from Prudential or Aviva or Legal & General or someone like that – so you can give them a call and ask for details about what you’ve got.
The Government also provides a free information service to help identify what you’ve got, called Pension Wise. Or, a good financial advisor will be able to talk you through what you have and what the options are.
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Can I review my pension plan?
Yes and it’s something more people should be doing. It is encouraged by both the government and by pension providers. The government encouraged us by providing the ‘pension advice allowance’ which allows you to take up to £500 a year for pension advice on three different occasions.
The benefit of doing a review is to check up on the progress that you’ve already made and make sure that you’re not losing out on better returns. You can also check whether you’re taking too much unnecessary risk with your pensions. It might be being devalued through market movements or inflation, for example. You can also ensure that you’re not losing out on any allowances that are available in each tax year. That way you can make sure that when you take your pension and actually want to spend your money, you won’t have to pay a higher level of tax.
What costs are involved when we’re looking at our pension options?
The costs really do vary from advice firm to advice firm. Here at Verve we charge fixed fees, depending on your individual circumstances and the services you require from us.
Our pension review services start from £500, but we offer a complimentary initial appointment to help us understand you and your circumstances. We’ll explain what service we think would be best suited to your needs and give you a cost for those services before you decide whether to go ahead.
How can a financial adviser help with pension options?
The real benefit of working with a financial advisor is to make sure that you’re on track to achieve your retirement goals. We’ll ensure your finances are held in the best possible way to avoid paying too much tax and make use of valuable allowances.
We also recommend and implement solutions designed to reduce the risk that you’re taking and improve your returns. We also explain what’s going on in the market and what could possibly affect you. You might have heard some negative media coverage – or ‘noise’ as we call it – we can explain what that means to you and your investments. That way you feel confident that you’re on track to get where you want to go.
The value of pensions & investments and any income from them can fall as well as rise. You may not get back the amount originally invested.
Quilter Financial Services Limited & Quilter Mortgage Planning Limited 11/04/2023