Understanding your pension investment options
Guy Myles, 20 June 2016
It's probably fair to say that, as a nation, we're not that interested in pensions. In the UK, pensions are often viewed as a concern of the old, rather than the young. It's entirely the wrong way to look at them.
Recent research has shown that the average middle-aged investor in the UK has around £53,000 invested in pensions. That can generate a retirement income of around £3,500 every year.
In many cases, as a result of poor choices, sky high fees and confusing charges, this figure could have been much higher.
The reality is that the pension investment choices we make can have a massive impact on the kind of retirement that we will have. The sooner we make a change, the bigger the impact.
Here, we take a look at the different kind of pensions you may have, your pension investment options and how you can go about ensuring your retirement is as comfortable as possible.
What pension do I have?
The first step toward taking charge of your pension is to understand what pension (or pensions) exist.
Defined contribution schemes
Within defined contribution schemes there are two main types: a self-invested personal pension (commonly known as a SIPP) and stakeholder pensions.
As their name suggests, SIPPs put you in total control, allowing you to choose from a huge amount of investment choices. You have access to individual shares, funds, or other options - the choice is up to you. It's an increasingly popular option that puts you in the driving seat, with online technology offering you complete access to all of your information.
Stakeholder pensions were set up by the Government in 2001 to offer a simpler option for pension investment and, through capped charges, to ensure that people were getting value for money. You can choose from a limited range of funds, or if you don't want to choose, your money will be invested into a default set of investments. Your employer may also contribute to a stakeholder pension on your behalf.
Defined benefit schemes
Defined benefit schemes are now rare and you're lucky if you have one as they are often very generous. You pay into one and on retirement receive a specified monthly benefit based on a complicated formula. These pensions are often great value, but offer you no choice in how they are invested, so we won't focus on them here.
Where are they?
Unless you've been employed in one place for your entire life, it's likely that you will have paid into a variety of pensions. Lost or forgotten pensions are a big problem for savers, so the Government has created a handy tool to help you track them down. If you have paid contributions into a pension, but have now left the company these are referred to as 'deferred' or 'frozen'. The good news is that you still have options with this cash either to leave it where it is, or transfer it to a SIPP or stakeholder scheme.
In the past, pensions have been an area that has been prone to financial mismanagement. As a result, a lot has changed, and you now have substantial rights to request information on your investments.
It's essential that you use them to accurately assess your financial position. As well as getting current figures, you can ask for retirement projection which will give you an indication of the amount you may receive when you retire. Be aware that the value of investments can go up and down, so treat all figures cautiously.
If you are a beneficiary of a defined benefit pension scheme you can also request a Cash Equivalent Transfer Value (CETV) - essentially the amount of money you can transfer from one pension pot to another. It's a complicated calculation, and you will lose the protection and certainty of your existing pension. This is not something that you should do without taking advice or being absolutely certain of your position.
Having access to all of your pension information should give you a clear outline of the total amount you have invested. You will also get an indication of the likely retirement income you can expect. Don't forget to consider your state pension when calculating this figure (currently £155.65 per week).
Often at this point, our expectations of retirement can hit up against the harsh reality of their current situation. The good news is, with solid pension investment planning even those nearing retirement can still make improvements to their current position.
Reducing your costs
A financial adviser can help you to take charge of your pensions. This may involve transferring existing pensions to more suitable investment options (including SIPPs) and looking at reducing the charges you're paying so that more of your money actually gets invested.
Independent financial advice can help to identify a solid and sustainable portfolio of low-cost funds to maximize returns. Balancing risks with return, while minimising charges and fees is key to ensuring your retirement is as comfortable as possible.
The pension market has often been described as a minefield, but it doesn't need to be. One of the reasons is that savers have often felt they have lost control. But with the right help they can start to take it back.
Reliable advice, a solid strategy and the transparency of products like SIPPs can help you plot a safer - and more profitable course - through this minefield, helping you achieve the kind of retirement you want. For expert advice on your pension investment options call Flying Colours today on 0333 241 9900.