Before I became a financial journalist at the start of 2016, I spent eight years working as a regulated financial adviser.
As I’m sure the current crop of advisers will attest, it’s a rewarding job, but not an easy one. My first full year in advice was 2008, the year of the global financial crisis. Stock markets plummeted, as did interest rates, and economies plunged into recession. Straight in at the deep end to put it mildly.
I can’t lie and say I found every aspect of the job enjoyable. I wouldn’t be a personal finance writer if that were the case. But the most fulfilling and interesting part for me was meeting people, finding out what they wanted to achieve in life, and helping them to get there. It also taught me a thing or two about what works and what doesn’t when it comes to making sound financial decisions.
One area that people really struggled with was retirement planning, which may come as little shock. Pension rules and taxation can be a maze at the best times. Knowing the right thing to do for your unique situation is hard.
So, as Friday 15 September is Pension Awareness Day, I thought I’d share seven pension tips I learned during my stint as an adviser that you might find useful.
1) Saving for retirement needs to pinch a bit
It would be great if we could tuck away enough for a comfortable retirement without having to make sacrifices today. Few of us, however, are that fortunate.
The chances are, if you want to retire on your own terms, paying into a pension will have to pinch a bit. You’ll see the money disappear from your payslip or bank account every month and think of 101 things you’d rather spend it on.
But whatever you save during your working life needs to last the duration of your retirement, which could be 30 years or perhaps even more. And chucking in loose change isn’t likely to get you there.
To be clear, this doesn’t mean you can’t enjoy yourself during your pre-retirement years. In fact, some retirees I saw regretted not spending more earlier on in life. It’s about getting the balance right.
It’s worth remembering that nudging up your pension contributions may only pinch at the start. Once you get used to the money going out every month, over time it should just become a regular and manageable expense. And this also explains why it’s so important to maximise your workplace pension and any tax perks, as your employer and the government will take some of the grunt for you. I do, however, appreciate that paying more into your pension may not be an option right now due to soaring cost of living.
2) Plan jointly if you’re in a couple
If you’re married, in civil partnership, or cohabiting, there are several benefits to undertaking the retirement planning process together.
First, you can make the most of any tax breaks. For instance, if one partner pays a higher rate of income tax than the other, it can be more prudent to direct more savings into the higher taxpayer’s pension.
But second, and perhaps more importantly, you can discuss and plan for the retirement you both want. You’ll have a clear idea about what you would like to achieve and understand the steps you need to take to get there. In addition, if one of you were to pass away before you reach retirement, the survivor will have the comfort of knowing where they will stand financially in later life.
Colin Dyer, a client director and financial planning and retirement expert at abrdn, wrote a brilliant article on this subject recently. It’s well worth a read.
3) Tell your adult kids to save - they will (hopefully) listen to you
As you may have found, getting teenage children to take your advice can be a challenge. However, things often change once they enter adulthood and financial responsibilities zoom into focus.
When meeting younger clients for the first time - and asking them about why they wanted to see a financial adviser - a common response was: “Because my parents told me I need a pension.”
They sometimes didn’t understand why or have a deep understanding of how a pension works. But either way, with their parents’ encouragement they had taken the important first step of kickstarting their retirement savings pot. And what you save early on in life can make a sizeable difference to the eventual size of your fund as your money has more time to benefit from compound growth.
What’s more, encouraging your children to engage with their pension may also open their eyes to other areas of their finances, such as shorter-term savings and protecting their loved ones.
4) Review, review, review
Let's be honest, there are more interesting and fun things to do than to review your retirement savings.
I saw some instances of people who had started a pension years ago (in some cases decades had passed) and had since paid their retirement savings little attention. Annual pension valuation statements were often stuffed into a drawer, sometimes unopened, and shoved to the back of their mind.
In the most extreme cases, this meant they neared retirement with little to no idea of how much income their savings would provide for them, and whether it was enough to live comfortably. Every now and then, if they had a defined benefit (DB) scheme or an old-style defined contribution (DC) pension with guaranteed annuity rates, the surprise was a pleasant one. But for a few, their pot was smaller than they had hoped, and they were running out of time to put things right. I must balance this by saying lots of people had planned diligently for retirement and reached later life in a strong financial position.
This explains why it’s so important to regularly review where your savings are in relation to your retirement goals - ideally at least once a year. This allows you adjust your savings strategy to reflect what’s changed in life. For example, as your earnings increase over time, you might want to consider upping your pension contributions.
Financial advisers use cashflow models to calculate if you’re on track to hit your target retirement income, but pension calculators such as interactive investor’s here can also do the trick.
5) Take your time when choosing how to draw retirement income
Few financial decisions are more important than how you choose to take retirement income. It can be the difference between peace of mind and sleepless nights.
To avoid the latter, take your time to carefully weigh up all your options before moving into drawdown or buying an annuity. Special care must be taken with a lifetime annuity because once you’ve bought one, you can’t change your mind. The terms that you secure at outset are fixed for life.
I met with several people who regretted their annuity purchase. Not necessarily because it was the wrong product, but often because they didn’t disclose health problems during the application process, which could’ve secured them a higher income. Others wished they’d chosen a survivor benefit so that the annuity income could pass to a spouse or civil partner on death.
To give you a better chance of making the right choices, it’s important to take your time and assess your retirement income options a few years before you intend to pack up work.
6) Try not to sleepwalk into tax year end
If you earn enough to pay higher-rate or additional-rate tax, or are a limited company director with excess profits, the end of tax year offers a great opportunity to give your retirement savings a boost.
What separates pensions from other tax wrappers, such as individual savings accounts (ISA), is the tax relief you get on what you pay in. And the more tax you pay, the greater the benefit you receive.
Paying lump sums into your pension at the end of the tax year can bring several benefits. It can help you pay less income tax or trim a corporation tax bill, and supercharge your retirement savings pot at the same time. It might also enable you to keep either child benefit payments or your personal income tax allowance, which can reduce and even be lost once your income exceeds a certain level. The combination of tax savings and retained benefits or allowances can lead to an effective tax saving of more than 60%.
7) Relying on an inheritance to fund your retirement is risky
I appreciate it’s hard to ignore an earmarked inheritance when planning your retirement. If your parents or grandparents have accrued significant wealth - which many have been due to soaring house prices - it’s natural to assume this will end up in your hands one day. And to be fair that’s often the way things work.
But there are some risks to this approach. One is that you have no idea when you might receive it. The average life expectancy in the UK is 79 for men and 83 for women, but many people live a lot longer. Your parents could still be alive and well long after you retire. I had clients who were still fit, healthy and cognizant at age 90. In 2020, there were more than 15,000 people over age 100 in the UK, a fifth more than the year before.
Long-term care is another factor - the costs involved can easily swallow up large chunks of the funds you hope to pocket.
It’s therefore wise to treat any potential inheritance as a bonus. I saw one or two instances of people who expected to inherit money when a loved one passed, but didn’t. Fortunately, they had planned accordingly and kept their future in their own hands.
These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.
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