You no doubt understand that pension rules are far from straightforward. There are many factors to consider when it comes to a pension, whether it be starting a new pension arrangement, transferring an existing pension fund to a new manager or making adjustments to an existing portfolio with some internal fund switches or similar.
There are, though, some key things that all pension investors need to be on the watch for as they could, potentially, lead to a loss of benefits if not properly advised. Here are some of them :
(1) Guaranteed Annuity Rates (GARs)
When you retire, whether fully or in part, your pension fund will buy you an income. With some good financial planning and sound financial advice, it could be the level of income that gives you the comfortable lifestyle that you desire. One way of securing the retirement income is with an ANNUITY. For example, if you were offered an income of £10,000 per year by an annuity provider and you had a pension fund of £200,000, you would have achieved an annuity rate of 5%.
However, what if you already had a policy that had a guaranteed annuity rate of 9% and you were considering a new pension provider? Would you lose that guarantee at retirement? If so, you could potentially lose out on £8,000 per year income because a policy with a GAR of 9% and a fund of £200,000, would secure £18,000 per annum at retirement. Hence, the difference of £8,000.
Yes, GARs are important considerations.
(2) Protected Tax Free Cash
More than likely you know that when you retire, you will be able to take a reasonable portion of your pension fund totally tax free. Under current rules and since 6 April 2006, that “reasonable portion” is 25%. With that fair chunk of money, you can do as you please – go on holiday, buy your dream sports car, start a business or pay your mortgage off completely.
What if you have a policy where the fund size is currently £50,000, let’s say, and the tax-free cash at retirement is currently forecast at £20,000? What does this mean to you?
In short, you have a policy that has a valuable feature as it is probably pre A-Day (what is this you ask?) and has a tax-free cash element of 40% of the fund. Compare this to 25% if you started a new, modern policy today.
Now, there are still a wide range of very good reasons not to hold on to such a policy. Nevertheless, without solid financial advice you could unwittingly relinquish something with significant value to you when you retire.
(3) Employer and Occupational Schemes
If we could advise you on an investment that absolutely guaranteed 100% return on your investment, would you accept?
As a rational investor, we assume your answer would be “Yes”, correct?
Well, we can advise you on such an investment and it is one that many fall into the trap of overlooking its value. Here it is :
If your employer has a pension scheme that you can join and they will match your pension contributions £-for-£, then you are automatically getting a 100% return on your investment. (You probably never thought your employer was so generous, did you?)
If you invest £100 into your employer’s pension scheme and they match you by adding another £100, you truly have a co-investor in your future. The best financial advice anyone can give you is to take up your “co-investor’s” offer, as it is probably the best return on your money you will receive anywhere.
These are just 3 of the pitfalls that a pension investor needs to be aware of.
Please do not hesitate to contact us if you would like us to conduct a detailed review of your current pension arrangements. You can get in touch by e-Mail, telephone or by sending us your initial Financial Advice question here.