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As you approach your retirement, you can use several strategies to boost your income. Most people make their way through their working life with little strategic planning for their retirement. They collect a series of different pensions and investments, each of which seem sensible at the time but often don’t take into account where they already are or where they are going. To be able to plan your retirement from a financial perspective, you first need to understand what is important to you. Only once you know what is important to you in the future can you ensure your finances can deliver exactly that.
Most people move companies several times during their working life. Each one of these companies will probably give you a different pension, so by the time you get closer to retirement, you will have collected a diverse array of different schemes to your name, which you will drag behind you like a wedding car does cans and streamers. Even those of you who run your own businesses will often have the same as a result of previous jobs, previous financial advisers or encounters with your bank.
Some of the older pensions you might collect may have some quirky guarantees and features that you will want to keep. Guaranteed annuity rates, for example, are usually really valuable, so you’d want to keep most pensions that employ them. Many will offer to pay you an income of 10% or more of the capital when you get to retirement. You are unlikely to be able to beat this through investment growth and are unlikely to get half that rate from buying an annuity from the open market, so you don’t want to let go of this feature.
Some pensions will have minimum growth guarantees. The important thing to do is to check. Ask the provider if you have these guarantees, and if not, you know you aren’t giving up valuable benefits by transferring.
There are also pension charges to take into consideration. There are a whole variety of ways that older-style pensions can charge you. There can be initial charges, exit charges, different units where higher charges are imposed on some but not others, ongoing charges, admin charges, flat charges and switching charges, to name but a few. As you can see, it can be complicated to compare the charges of one pension to another. That’s why you, or a Financial Adviser, need to simplify the process. First look at the effect the charges have on your money by picking a set growth rate (for example, 5%) and seeing what you end up with at age 65 from both schemes. The respective companies will be able to give you illustrations of this data, as long as you know you are comparing apples to apples.
It used to be that all companies provided projections with set levels of growth at 5%, 7% and 9%. In its wisdom, our regulator the FSA (now FCA), changed this to reflect more accurately the growth you might receive for that level of funds. Whilst I understand why this illustration is more useful for the consumer, it also makes it impossible to compare one to another unless you have a degree in spreadsheets!
As a result, we do things slightly differently to simplify matters further. We look at a critical yield when comparing the two schemes. What this means is that we look at whether your money in an alternative scheme has to grow at a higher rate or a lower rate to achieve the same amount of funds. If this is a positive figure, you know that the changes of the new scheme must be higher, and if it is negative, you know the charges must be lower.
Charges are important to assess, but only when assessed with the likely difference in growth can they be quantified. Whilst past performance is no guide to the future, over a five-year time frame or possibly longer, it can be a useful guide. Better, however, is to anticipate what a particular portfolio is likely to deliver in the future.
When it comes to charges, some of these older pensions do not make clear how much money they take off from likely future growth. The biggest culprits are ‘With Profit’ funds, where the company does not indicate the charges and often doesn’t tell you the underlying fund performance unless you do some serious probing. You don’t even keep what growth they manage to get, because they allocate bonuses to you based on the growth. The theory works for the good years they give you most of the growth while keeping some for the bad years and, in effect, trying to smooth out the returns of the stock market.
This theory would also work if you could take your money out unaffected. However, the company can impose a penalty at any level the moment you want to take your money out. This situation is known as a ‘Market Value Adjustment’; if the fund administrators want to impose a 50% penalty on your money, they can. Avoid the smoke and mirrors of the ‘With Profit’ life company funds. It is much better to select an investment level of risk that is appropriate for you than to leave it all in the hands of a company whose sole purpose is to make money for shareholders!
Another question to ask when looking at in these older schemes is, ‘Are you still paying commission to some adviser you haven’t seen for years?’
If you are not getting an ongoing service from an adviser then you should no longer be paying them. You should only be paying for advice and a service if you are getting it, and if you were promised an ongoing service that you aren’t getting, you should put a stop to it.
The first step in achieving your goals is to discuss your current concerns with one of our qualified Financial Planners.