Saving for your retirement is one of the most crucial financial tasks you will ever face. It is also quite a complex undertaking so it’s a good idea to get tailored pension advice from an FCA approved, independent, financial advisor like Moneyfarm.
The types of pension plans available
All UK citizens are entitled to receive the UK State Pension. However, you must have made at least 10 years’ worth of qualifying National Insurance contributions to be eligible. But the State Pension on its own will not be enough to provide most people with an acceptable lifestyle in retirement, so the UK government made employers legally bound to provide workplace pensions, and introduced automatic enrolment.
While that is fine for those who are employed and who meet the criteria, it leaves the self-employed in a precarious position. However, there are other pension and investment opportunities that the self-employed and those who feel their workplace pensions are not on track can take, to secure their futures in retirement. In this blog we look at the types of pensions and the prospect of getting free pension advice.
The State Pension
The full new State Pension is £221.20 per week. To qualify you must make 35 years’ worth of qualifying NI contributions. The take-off point for receiving any State Pension is 10 years’ worth contributions. This criteria applies to both those in employment, and those who are self-employed.
If you discover you are behind with your NI contributions, you can get State Pension advice. The government pension advice website has been replaced by the Money and Pensions Service (MaPS) website, so if it’s gov pension advice you’re looking for, this is where to go. As regards making voluntary NI contributions to fill any gaps, you can visit the Gov.uk webpage entitled ‘Voluntary National Insurance’ for more information.
Workplace Pensions
Workplace pensions and automatic enrolment have been in place since 2012. They are a type of personal pension. There are now more than 2.3 million employers in the UK offering them to over 20 million people. Most of these pensions are defined contribution schemes whereby the employee contributes 5% of their salary into a pension pot while the employer contributes at least 3%. If you want pension advice about your workplace scheme, the place to start is with your employer.
Private Pensions
Whereas a workplace pension is set up by your employer, who also makes employer contributions, a private pension is set up by you alone, albeit possibly with pension advice from a UK financial advisor. There are several types of private pensions, and they include:
- Stakeholder pensions.
- Personal pensions (usually set up by insurance companies).
- Self-Invested Pensions or SIPPs
- The Moneyfarm pension.
All of these pensions rely to various extents on investing in bonds, and stocks and shares. As investments carry a degree of risk, pension schemes usually have FSCS protection.
Pension Advice for Different Life Stages
The earlier you start saving into a pension the better. The introduction of workplace pensions has gone a long way towards achieving that aim. But even so, the amount you’re saving may not be enough, especially if you are aiming to enjoy a comfortable lifestyle, which according to The Retirement Living Standards website, requires an annual expenditure of £43,100 per year. But bear in mind that this figure is expenditure. In other words, it doesn’t take income tax into account.
Your financial situation changes as you go through life. Hopefully your salary will increase as you progress in your career. You may get married, buy a house and have children. You may come into inheritance. As your financial outlook changes, you should review whether your retirement savings are on track and whether you can afford to contribute more to your pension(s). It’s best to seek new pension advice accordingly.
As retirement looms closer, it’s even more important to carry out a review of your savings. Moneyfarm provides pension advice for over 50s as they seek to get to grips with altering their pensions plans.
Understanding Pension Transfer Options
Most people change jobs several times in their working lives. It means that you can accrue a number of workplace pensions and sometimes they get forgotten or are left languishing and underperforming. If this has happened to you, one good piece of pension advice is to transfer and consolidate them. Pension transfer can be used to not only get the best out of your pensions, but to make them easier to manage, too.
Of course there are other investment options available. While pensions tend to be the definitive savings vehicle for retirement, they are not the only one. There are other options too, such as stocks and shares ISAs. Of course you have to be disciplined with ISAs because you can withdraw money from them at any time and it might be tempting to do so before you retire. But one of the biggest benefits with ISAs is that withdrawals are income tax fee.
Pension Advice on Tax Implications
All UK citizens have an annual allowance of £60k per tax year. It means that this is the amount of money you can contribute to your pension and receive 20% tax relief from the government. It is in effect, tax free money, so the more you can afford to contribute to your pension pot, the better.
Another important tax benefit with pensions is that you don’t pay tax on the interest you accrue. Any money you withdraw from your pension pot is free from capital gains tax. But that’s all. After that, pension income is taxable as any good pension advice service should tell you. It applies to both the State Pension and any personal or private pensions you may have. Yes, you can withdraw 25% from your pension pot tax free when you’re 55 (changing to 57 in 2028), but anything thereafter will form part of your taxable income.
How to Choose the Right Pension Advisor
Wherever pensions are concerned, the most important thing from a safety point of view is to avoid pension scams. Unfortunately, they are still rife and usually appear or sound quite genuine and can catch the unwary. The way to ensure that any pension advice you are given is safe, is to check that the financial service advisor you talk to is FCA registered.
It’s also a good idea to talk to an independent advisor. That way you can ensure that any free pension advice you are given, is not adversely biassed in favour of one particular product or pension provider.
How much does pension advice cost? It should be free. If it isn’t you are being ripped off.
The Role of Pension Advice in Retirement Planning
Getting the right pension advice can help you to achieve the right size of pension pot and level of income to finance the lifestyle to which you aspire. It can help you to make the most of your annual allowance (currently set at £60k per tax year) and help you to maximise any income tax benefits.
A good advisor will take the time to establish what you really want from your retirement and where you’re at in the present. Then they’ll tell you if you’re on track to reach your goals but perhaps more importantly, will be able to provide you with Independent pension advice if you are not.
Common Pension Advice Mistakes to Avoid
One of the biggest mistakes anyone will ever make when getting advice about pensions, is to listen to someone who isn’t a trained professional pension advisor, or to fall for one of the many scams that are around.
As well as leaving it late to start saving, not saving enough is another common mistake, and if not rectified in time could leave you in difficulty when you come to retire.
Not diversifying your retirement savings could land you in trouble. All investing carries an element of risk and diversification is one way of mitigating that risk. Think about not just diversifying assets, but savings vehicles too. There’s nothing stopping you from having a workplace pension, a SIPP, and a stocks and shares ISA, if you can afford to.
Another common mistake people make is not to keep a regular check on their pensions. Not doing so can result in them getting overlooked and even forgotten, or that they’re underperforming and are short-changing you.
If you are self-employed, one of the biggest mistakes you can make is not to start your own pension. If you haven’t got a workplace pension, start a SIPP. Free pensions advice in the UK is readily available from many sources, but it’s not good saying, “I couldn’t get pension advice near me where I live”, so I just picked an advisor out of the hat online. Do your own due diligence and make sure that whoever you talk to is registered and approved by the FCA.
*As with all investing, financial instruments involve inherent risks, including loss of capital, market fluctuations and liquidity risk. Past performance is no guarantee of future results. It is important to consider your risk tolerance and investment objectives before proceeding.
