Why is a pension MOT so important?

For most of us, our pension will be the most valuable thing we will ever own (that we don’t live in) but at present, only a minority of people regularly review their pension benefits. A report carried out by Barings Asset Management revealed that ‘A staggering 13.6m Britons have never reviewed their pension plans while a further 2.2m have not done so in the past five years’.

In the past, the choices available at retirement were pretty limited. People were either paid a salary-related pension automatically at a set date or they could be expected to turn their pension pot into an annuity. More recently, with the advent of pension freedoms and the move away from salary-related pension provision, individual savers now have a lot more choices to make, including decisions about when and how to stop working. This requires a much higher level of engagement and support than currently exists.

So when should people start thinking actively about their retirement finances?

Don’t leave it too late

Waiting until you receive a ‘Retirement Options’ pack from your pension provider, typically three months before you retire, is leaving it too late. A much better idea is to engage with your pension planning at a considerably earlier date.

The government is promoting the idea of a mid-life ‘Financial MOT’. The suggestion is that at a particular age (such as 50) individuals should review their objectives and finances and make changes to get back ‘on track’ to achieving their retirement goals.

The feeling is that turning 50 is one of those points in life when people are likely to be willing to think more about pensions and retirement. On the other hand, it is not so far through working life that there isn’t time to make changes which could make a significant difference to quality of life in retirement.

Achieving retirement objectives

Another good reason for reviewing your finances sooner is that the way your money is being invested needs to match your retirement plans. You may have carried out a risk questionnaire previously, but it is important this risk rating still reflects your goals and objectives into retirement.

It is, of course, ideal to keep your retirement finances and retirement plans under regular review and to do so throughout your working life. But for most people with busy lives and other things to think about, the idea of a big review on a significant birthday such as their fiftieth could be a really positive initiative.

Tax benefits

Using a pension is simply a way of building up a tax efficient sum of money to provide an income when you retire.

When you save into a pension, the government rewards you in the form of tax relief.  When you earn tax relief on your pension, some of the money that you would have paid in tax on your earnings goes into your pension pot rather than to the government.

Tax relief is paid on your pension contributions at the highest rate of income tax you pay. So:

  • Basic-rate taxpayers get 20% pension tax relief
  • Higher-rate taxpayers can claim 40% pension tax relief
  • Additional-rate taxpayers can claim 45% pension tax relief

The tax benefits of a pension will depend on your personal circumstances and tax rules in force; both of which can change in the future.

Retirement options

Whether planning to retire fully, or gradually, there are now more choice and flexibility in how to provide you and your family with an income in retirement.

Many of us are living longer so the chances are you will be retired a long time. It’s therefore important to make sure you have enough secure income so you’re not worrying about your money running out.

The choices you can make are:

  • Take some or all your pension pot as a lump sum
  • Use drawdown pension to draw an income from your pension
  • Convert your pension pot into an annuity

State Pension

  • Alongside your personal pension savings, you will be entitled to a State Pension (providing you have at least ten years of National Insurance contributions). It is worth checking online to find out how much you might be entitled to and when you can claim it. Under the new flat-rate, the state pension is currently £164.35 per week, or £8,546.20 per year.

Questions to ask yourself:

  • How much is your pension pot worth today?
  • What age do I wish to retire?
  • What income do I wish to retire on?
  • What will the government give me?

Irrespective of your current age and the stage in your career, we can provide all the advice you will need to make an informed decision on your retirement planning.

How can we help?

If you would like advice on any existing pension arrangement, or you would like to discuss setting up a new personal pension, please give us a call on 01423 223 640 or complete the online enquiry form and we will give you a call to discuss your requirements.

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