Why do people need it?
Since the Pension Freedoms started, many people saving for retirement plan to take their defined contribution (DC) pension pots flexibly. A small percentage may still buy incomes for life (annuities) at retirement, but for the majority, flexibility in taking pension income is the way forward.
Everyone likes something more flexible! However, the problem is that with flexibility comes responsibility. The main responsibility is to make sure you get the income you want in retirement whilst not running out of money. With flexibility, “guaranteed for life” disappears.
But this can be tough to work out for yourself, especially when you add in the other income you may well have in retirement, such as: your State Pension, that old final salary scheme from a job from 15 years ago and the bit of part time work you plan to do. That is also not to mention that your pension pots are scattered over 5 or 6 different providers from different employers.
For the normal person who has about as much interest in the pension calculations that actuaries like us do, as they do in the life cycle of a Pangolin, (remember when none of us knew what one was?), it is really hard to get these calculations right and get the best possible outcome.
Where can I get help?
First and foremost, the best option for everyone is to get advice from an Independent Financial Adviser (IFA). However, it is widely understood that for many this is too expensive or just isn’t available if your pots aren’t large enough. The Financial Conduct Authority (FCA) recognises that there exists “an advice gap” around pension freedoms, where there is a “non advised mass market”.
Financial advice won’t guarantee you the best outcome, but it will go a long way to minimising the risk of achieving a bad one.
If you are unwilling to seek or unable to get independent financial advice, you can still get many (but to be clear, not all) of the benefits an IFA will provide at no cost. Below we dive into how to do exactly that.
What help does independent financial advice provide?
In this case, we are talking about advice for the average person. We are not talking about people with annual allowance, lifetime tax allowance issues, or those with large inheritance tax planning issues. If that’s you, then you can probably afford advice!
We are talking about Jenny, who is in the “non advised mass market”. She’s aged 50, thinking about her future retirement and wanting to understand how best to solve the problem above.
An IFA will help her by:
- Designing her a plan with their software so that she knows how to build up and how much to take from her pots each year (pension drawdown)
- Make her plan tax efficient
- Assess her risk appetite and build her an investment portfolio
- Consider a suitable provider, with low costs and great features to suit exactly what she wants, to put all of her pension pots together with
All of the above will help her to achieve the best outcome possible, given what she has. But what if she can’t afford it, or can’t get advice?
How else can Jenny get this help for free?
Firstly, there are government websites available such as Pension Wise and Maps that will give her some basic understanding of pension issues as well as ensure that she understands the pension freedoms and the other options available to her.
Next, free tools like ours allow her to build her own pension plan, see how much she needs to pay in and how much to take in retirement. This gives her many of the benefits of the professional IFA’s software, but is simple enough to use herself.
We also cover the tax aspect, ensuring she takes her income in the most tax efficient way if she has both pension pots and savings, so her pots last longer. And all that is free for her as well!
To help her choose investments, most providers now have ready made investment portfolios for her to choose from. Their investment experts have already done the work for her, so she can just choose one which best suits her risk appetite.
Jenny will want to put all of her pots together at some point before retirement. This will make it easier to take income all from one place when she retires, (unless their are specific reasons not to, such as her employer is paying in as well, or there are valuable guarantees in her current plans). Given this, she will want a low cost provider with charges she understands and who will tell her if its not in her best interest to transfer.
Unfortunately, many pension providers are less than transparent about their fees. If total charges are not clear from the very beginning, this is a strong warning sign against choosing that pension provider.
At Guiide we only link with providers that make their charges crystal clear and include everything. On top of that, they offer some of the most competitive prices on the market.
Once she’s built a plan with Guiide, Jenny can see exactly how much can be saved with these providers and compare it to her current, or the average charges over her lifetime. This means she can then keep more of her pots for her own retirement income rather than have charges nibble away at them.
Key points
Using the Pension Freedoms yourself can be complex, even for the financial experts!
Many people do not take advice and therefore need some free help and guidance in order to take advantage of the benefits offered by the Pension Freedoms.
The free help and guidance is out there, and we like to think that ourselves and our partners provide a great route to it. Give us a try and see if you agree!
