Pension planning: do you need a financial adviser?
Your pension takes a lifetime to build up. From setting it up to building your savings and drawing an income during retirement, there are many factors to consider at every stage of your adult life.
Millions of people need to plan for retirement, but it’s not easy, which is why financial advice is vital.
Here we explore the reasons why it’s important to use an independent financial adviser (IFA) when planning your pension and choosing how to access your pot during retirement.
Do you need a financial adviser to start a pension?
If you’re an employee (i.e. not self-employed or unemployed), you’ll be enrolled automatically into a workplace pension.
You won’t need advice, but it can still be useful to help you choose the right fund.
If you have a public sector pension, such as an NHS pension, it’s also worth seeking advice to help you make the most of it and avoid certain pitfalls.
However, if you don’t have a workplace pension, you’ll need a personal pension scheme unless you plan to rely on your partner’s pension in retirement, which can be risky.
The state pension usually doesn’t offer enough money for most people to live on.
You can set up a personal pension scheme without getting advice from a financial adviser.
However, there are many reasons to talk to an IFA, including:
· Helping you to understand how your pension works and manage risk
· Helping you to choose from a diverse range of investments
· Helping you avoid common and costly mistakes
· Understanding how tax relief works and ways to be more tax-efficient
· Understanding costs associated with different investments
Do you need an IFA to manage your pension?
You can manage your investments yourself or use an expert for support and guidance.
If you choose to manage your pension yourself, it’s worth considering a stakeholder pension or self-invested personal pension (SIPP), the latter of which involves choosing investments that go into your pension.
An adviser can help you pick the best funds and grow your pension faster with less risk.
There are many reasons to get financial advice to manage your pension, including:
· Helping you to manage your pension funds over the long term
· Running regular reviews of your investments to optimise your returns
· Keeping you on track to meet your big life goals
· Offering peace of mind that you can plan for the retirement you want
Do you need an IFA to transfer a pension?
There are two main ways you might ‘transfer a pension’, so it’s vital to be clear which one you mean.
Transferring a pension can mean:
· Trading in a defined benefit pension scheme
· Moving a defined contribution pension pot from one scheme to another (or combining many into one)
Trading in a defined benefit scheme
This kind of transfer involves trading in a defined benefit (also known as a final salary) workplace pension for a pension pot that’s of a similar value, i.e. a ‘defined contribution’ or money purchase pension.
This is something for which advice is usually necessary.
If the pension you want to transfer has a transfer value of at least £30,000, then the law requires you to get financial advice as an IFA won’t allow the transfer, and will charge you for full advice.
This may be expensive because by advising you to transfer, the IFA takes on liability and risk if the decision is a bad one.
For example, the stock market might fall significantly after your transfer, wiping out a lot of your pension pot - or you might withdraw too much and run out of money quickly.
As a regulated adviser, an IFA is responsible for the advice they give and for your financial protection.
Moving a defined contribution pension or consolidating your pots
You can move a pension pot from one scheme to another or combine many pensions into one, which is known as pension consolidation.
There are some key questions you should ask your pension provider and IFA, including:
· Will my new pension cost me more to manage than my current one?
· Should I transfer all my assets into a single pot?
· Are there any charges for my pension transfer?
· Will I lose any guaranteed benefits?
· Will the new investments match my risk appetite?
· Will I need more advice in the future?
Do you need an IFA to cash in your pension pot?
Cashing in a pension, which is when you withdraw the whole amount as a lump sum, is not usually recommended unless the pot is very small.
The whole pot will count as income for that tax year, and be subject to income tax, so it could push you into a higher tax band, leaving you to pay a rate of at least 40% (up from 20%).
This may cancel out the whole benefit of having a pension (tax-free saving), so it’s difficult to see why someone would want to do this except in a financial emergency.
If your defined contribution pension has a guaranteed annuity rate (guaranteeing the amount of income you get when you retire), then it’s a legal requirement to seek financial advice before cashing it in if it’s worth at least £30,000.
Expert financial advice is highly recommended in any case. Similarly, you can’t ‘cash in’ a defined benefit pension without getting advice.
In most cases, guaranteed income from your pension will be preferable to a non-guaranteed finite lump sum.
Learn more: what is a guaranteed annuity rate?
Do you need advice to access regular pension income?
While it’s not a legal requirement to consult an IFA when accessing your pension, this is one of the most important times in your life to seek financial advice.
The decisions you make when you start to access your pension can have implications for the next 20-30 years, and the sums of money at stake may amount to thousands of pounds.
Given the seriousness of these decisions you will be making, it is vital that you seek expert advice.
For example, if you are considering buying an annuity, you will need to think about which type you want.
Lifetime annuities offer a fixed income, while investment-linked annuities are affected by the performance of your underlying investments, so your income can go up and down.
Also, annuity rates are influenced by your health and age. An IFA can help you find the right product and the best rates, which can make a difference of thousands of pounds during retirement.
If you want to take out a drawdown scheme, financial advice is also crucial. An adviser will help you choose the most suitable fund, set it up for you, and advise you on how much to withdraw from your pension pot.
How else can an IFA help with your pension?
There’s a lot of choice and flexibility for accessing your pension, but this also brings extra responsibility and risk.
An IFA can help you make the most of your investments and they can also keep you up to date with changing pension rules.
Research by Royal London has revealed that consulting an IFA will generally make you wealthier in retirement over the long term.
Review your pension
To discover how a financial adviser can assist you with retirement planning, you can start getting a pension review.
A qualified IFA can look at your pension arrangements and give you an independent assessment, so you can decide whether to proceed with pension advice.
Unbiased can quickly match you with an adviser or alternatively you can find an adviser near you.
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