Pensions are an extremely important aspect of your future once you retire and it’s important they are reviewed at different stages of your life to ensure you get the best out of your retirement.
Different types of pensions
It can seem as though there are hundreds of pensions to choose from and whilst there are variations depending on your personal circumstances, there are two main types of pensions you need to be aware of; a defined benefit pension and a defined contribution pension.
A defined benefit pension, also more commonly known as a final salary pension, provides you with a guaranteed income for your entire retirement and it typically increases in payments, making it known as the ‘Rolls Royce of pensions’.
Defined contribution pensions, also known as personal pensions, have a fund value and that fund value and how it grows then determines the amount of money you are likely to get when you reach retirement.
Why do you need a pension review?
No matter what type of pension you have, it’s important you have it reviewed.
Since the introduction of pension freedoms where people had more flexibility over their pensions, we have seen more people starting to review their defined benefit pensions with the view that they would benefit from taking it out of the ‘guaranteed’ environment and moving it into an invested environment. However, as these pensions provide a guaranteed income that’s likely to be heavily relied upon, most people want to eliminate the risk element and keep it within a guaranteed environment.
However, it’s more common to review a defined contribution pension due to its varying nature. Most people will receive a statement with their fund value for the year and have examples of growth at 2%, 4% and 6% – so if the fund were to grow at this rate, you will receive ‘x’ amount at retirement.
It’s incredibly important to review your defined contribution pension because most people don’t actually understand what their fund value is growing at, so you could be seeing a lower rate of 2% when you could actually get a higher rate of around 6%, resulting in you having a better pension fund to enjoy throughout your retirement.
When should you review your pension?
Knowing when to review your pension is key to getting the best out of your pension pot and retirement in general.
It’s most common to review your pension when you hit around 35 years old – and this has even been reducing in recent years. With the introduction of auto-enrollment, workplace pensions and people generally becoming more forward thinking, the age in which people are starting to review their pensions has reduced. It’s not uncommon for us to see a younger client coming through the door wanting to know more about pensions and what they can do with theirs.
However, it’s important to bear in mind that there is no right or wrong when it comes to the age in which you should review your pension. It’s very individual to personal circumstances, but an initial chat with us means we can give you guidance on whether you should be doing anything at this moment in time.
We also know it’s common for your retirement needs to change throughout the course of your life, so what might have worked when you were 35, might not be right for you at 60. There are no set ‘goal posts’ for your pension and no one’s circumstances are the same. With various different life journeys and circumstances, it’s common to need to alter your pension plan.
It’s also wise to review your pension if you’ve had lots of jobs with various pensions spread across different areas. If this is the case, it’s likely you won’t be aware of what you are investing in or how much your pension is going to provide you – it’s a good idea to come to us and get it put together all in one place and having a pension review can allow us to do just that.
What’s the process of a pension review?
A pension review starts with an initial meeting where we would get to know you individually, understand what you have around you, what pensions you have and get you to think about what your dream retirement looks like and the income you think you may need. It’s not uncommon to be unsure of this information, so we use a budget planner to find out what you are spending now and what you think your spending habits might be like throughout retirement.
We also discuss the costs for us to complete a pension review and we’d also have a look at your risk appetite to see what level of risk you’d feel comfortable with, given the fact that pensions are investments and the nature of investing means they are likely to fluctuate.
Once you’re happy for us to proceed, we would then get your permission to write to your pension provider. We would collate very detailed information from that pension provider and effectively, once we had everything back from them, we’d analyse the pension in detail, looking at the benefits within the pension and what you are actually paying charge-wise.
We would then complete an analysis of what you’re invested in to see how it’s performing and whether it suits the risk profile suitable for you. One we’ve established your ideal income amount, we analyse whether we are likely to achieve this with what you have invested. If not, we look at what we need to do to ensure we improve the performance of your pension.
The pension review process may seem a little daunting, but rest assured we make it extremely visual so it’s easy for you to follow and understand.
What is the cost of a pension review?
Our initial consultation is completely free of charge, but for the research work needed for your pension plan the fee can be anywhere between £295 and £495, depending on how many plans you have.
If the recommendation would be not to consolidate or move any further forward, then this is all you would pay. If the recommendation we make means going down the route of a consolidation exercise, we would then charge a percentage fee based on the amount of funds we were consolidating.
What happens if you don’t review your pension?
It’s down to you whether you review your pension or not and each case is completely different.
You could review it and find you don’t need to make any changes, in which case you have the peace of mind knowing you are getting exactly what you need for your retirement. But you could also reach retirement with less money that you could have had if you had taken the time to review your pension earlier down the line and made the necessary adjustments.
The value of investments and any income from them can fall as well as rise and you may not get back the original amount invested.
At CD Financial we do not provide advice on Final Salary/Defined Benefit pensions.
However, as an appointed representative of Openwork we are able to refer you to Final Salary/Defined Benefit pension specialists, who we collaborate with in order to ascertain whether a transfer may be suitable.
If a transfer is found to be suitable we can assist with the transfer process and offer ongoing services to help manage your pension long term.