Pension planning: do you need a financial adviser?
31st Jan 2024 Pensions & Retirement
5 min read
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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