Much of the work that we undertake for clients relates to their retirement planning, which will for some include pension planning. Before we help clients take a step forward with such, it is important to pause and firstly establish the value of what has been undertaken to date.
Most clients will have at some time been a member of an occupational pension arrangement or two, or accumulated their own provision within a personal pension.
Here, in the first of series of articles, we will take a simplified look at some of the reasons why clients should review their pensions. However, in future articles, we will take a look at some of these in more detail.
Charges – The charges of many pension plans are often pegged by pension providers to protect against a mass exodus of their portfolios purely for the reason of excessive charges. However, some older policies can still have quite convoluted and expensive charging structures. Equally, because of the advent of technology, some newer policies can be more expensive than need be too. Whilst ongoing charges may be cheaper, due consideration should be given to exit penalties.
Check the funds for risk – It is common to see clients investing without fully knowing where their money is being invested and appreciating what risk is associated with that investment. The underlying funds in which one invests should always be in keeping with a client’s tolerance to risk.
Check the funds for performance – Not only is it imperative that pre-retirement funding is made in appropriate investments but also to ensure funds / investments are performing to satisfactory levels. Below par performance can have a significant and detrimental impact on the overall return from retirement funding. There can be a substantial difference between a good fund, an average fund and a poor fund.
Inherent features & benefits – Some plans structures may include guaranteed minimum returns, either by way of an annualised return or intrinsic minimum value at retirement. Others may include a Guaranteed Annuity Rate, commonly known as a GAR. These can be valuable benefits which should not be instantly discounted or given up without informed consideration.
Tax free cash (TFC) entitlement – In the time before the pension rules were simplified on 6th April 2006, commonly known as A Day, there were many different pension regimes that governed many different types of pension plans. For occupational pension arrangements, tax free cash was not as simple as 25% of the fund. Where individuals had a higher than 25% entitlement, the rules allowed for this to be retained, on the proviso that this was auditable and could be proved. This remains the case to this day and forms an important part of every review of an occupational pension scheme that we undertake. In our experience, the difference can be quite startling and it can be a valuable benefit lost if not at least considered.
A good pension provider is not necessarily a good pension provider– No matter how well a pension is funded, invested, managed and maintained, a large influence on the resulting benefits can be the provider of the pension income. Often this is secured by way of an annuity. As with fund performance, there can be a substantial difference between a good annuity provider and a poor annuity provider. A highly competitive annuity may be increased yet further if the pensioner qualifies for enhanced or impaired life annuity rates. The benefit from these is down to the severity of the condition.
Pension income options – Whilst newer, more modern arrangements may facilitate income drawdown, many old arrangements may simply offer an annuity as the sole source of providing pension income. Despite the new rules on pension flexibility coming into place on 5th April 2015, it has already been stated by a number of pension providers that due to stretched resources, their IT systems will not be changed to allow this new functionality. Therefore, in order to access the new flexibility, transfers to alternative pensions will need to be considered.
Please feel free to contact us if you would like to discuss informally or formally your existing or future pension planning. Don’t hesitate to let us help you to ‘review my pension’.