Choose Life – Don’t Want Your (Pension) Freedom?

It was a remarkable year on so many fronts, and many of us looking back on the long list of celebrities who took a final bow in 2016 will find it difficult not to feel wistful for our departed youth and perhaps a slightly heightened sense of our own mortality.

Nobody wants to believe that perma-tanned, lithe blond-bombshells could become reclusive because of their embarrassment at the amount of weight they have piled on following years of every conceivable over-indulgence; but even the abstemious are rarely spared Old Father Time’s attention.

Admittedly, you’re still looking pretty good, all things considered, but maybe now is the time to bite the bullet and get to grips with that pension and give yourself the opportunity to choose the life you want in retirement.

Given that life expectancy in the UK (outside of celebrity circles) has now reached 81.5, as identified by a recent YouGov survey for M&G Investments there are a lot of pension pots out there that are going to struggle to deliver the quality of life that savers aspire to –  read more.

However, there are a number of things that you can do to make sure that you are managing your pension in the most efficient way, or are at least aware of what your retirement might look like; a few hours invested now could deliver life-long benefits.

Firstly, take stock; most of us will have accumulated a number of pots during our working life, and subject to us having made the requisite 35 years of National Insurance contributions, will also have call on the full state pension of £8,000 a year – check your state pension forecast here.

Notwithstanding the well-documented near £1 trillion shortfall that exists, those with a defined benefit (sometimes ‘final salary’ scheme) are still considered to have the blue riband in pension circles and you may also have additional savings in ‘defined contribution’ (DC) pots.

In the past a DC pot would have necessarily have been used to buy you an income for the rest of your natural upon your retirement – an annuity – and for the sake of illustration you should work out what your DC pots would buy you in today’s annuity market here.

Then, consider all of the companies you have worked for in the past – if necessary you may use the government’s free pension tracing service – and build an overall picture of your total net worth in retirement.

You may ultimately decide to eschew the certainty and security of an annuity, but it is worth working out precisely what your total provision would translate to as an annual income – a rule of thumb is that £1000 saved into a DC scheme will buy you £45 a year for life.

You should now be able to weigh up the total annual income that you can achieve from the pots you have accrued with the retirement you aspire to.

OK, breathe; it’s not the answer you hoped for, but you can do something about it by increasing your contributions.

Because of auto enrolment, most in work now have the opportunity to save into a pension and your employer is legally required to contribute a minimum of 1% of your salary; however, many firms will offer staff much higher amounts if you save more, up to a cap – 5% on either side is common.

According to Pensions Policy Institute, saving 14% through auto-enrolment gives younger earners a two-thirds chance of retiring on two-thirds of their salary – the level it is believed is required to maintain an existing lifestyle in retirement.

Keep hold of it; now that your contributions are up to scratch, make sure that you are not giving it away by missing out on tax efficiencies.

Despite Mr Osborne’s numerous raids, tax incentives on pensions remain generous; tax relief is paid up to your highest rate of income tax , so a higher-rate payer only needs to pay £60 to make a £100 contribution.

However, pension companies only automatically claim tax relief at the basic rate of 20% and it is left to individuals to claim the higher and additional-rate sums owed to them via their tax return; an estimated £360m in pension tax is unclaimed each year – make sure you don’t contribute to that total.

Take control; pensions used to be something that ‘happened’ – some money was taken each month and was returned at retirement as a lump sum that reflected the success, or otherwise, of the funds the pension manager selected. This then bought an income for life.

However, with pension freedoms comes choice, not to mention personal responsibility; take the entire pot as cash, buy an annuity or go into ‘drawdown’ – just aim not to outlive your pot.

It’s a big responsibility, but an increasing number of investors are deciding that they can improve upon the lacklustre performance of the ‘default’ funds that they are pigeonholed into by their pension provider, and save themselves some chunky fees to boot.

In for a penny; if you’ve got this far through the tick-sheet, you’ve probably devoted more time to thinking about your pension that ever before, so why not see it through?

The work you did in identifying each of your pension assets may have thrown up a very obvious opportunity to streamline your savings and to consolidate them in a way that is cost-efficient, simplified and likely to deliver you the best income in retirement.

After gathering together the information gleaned in the first step, you might quickly see that it will save money to group some or most of your pension assets together; some schemes have better investment choice or even pay your management fees.

Now that you’re in full swing, take a look under the bonnet, because pensions can vary greatly in terms of flexibility; as an example, in the past many plans only allowed death benefits to be made as a single payment potentially attracting a greater tax liability than modern schemes which allow a series of withdrawals.

If you do decide to grasp the nettle, be careful to understand what you are giving up; schemes offering eye-catching payments for you to exit are not just doing so because they are thoroughly decent chaps; they would be happy for you to leave because of the high cost of providing the often generous terms of your plan, and particularly final salary scheme.

Many defined contribution contracts contain guaranteed growth or annuity rates which are far more generous than those you could achieve in today’s market; the sums being offered for savers to cash in their guaranteed income for life are at record multiples of annual benefit, but those choosing to do so are then taking on responsibility for ensuring that their pot achieves sufficient growth to deliver them an income for the rest of their life.

Any transfer over £30,000 will require you to take financial advice and however tempting it may be to trade a £35,000 annual benefit for a £1.2 m lump sum; those with no other source of income and little experience of investing could be excused for feeling a little nervous.

However, one certainty is that the pursuit of income will be a recurring theme for DIY Investor and those taking the plunge will be encouraged to share their thoughts and invited to learn from the experiences of others.