Pre-Retirement
Living life as well as saving for retirement.
What are my options for investing in a pension?
It is essential that a person carefully reviews how funds are invested in their pension on an annual basis. As people grow older, the investment strategy should transition from higher risk investment options to low risk, slower growth rate options.
Should a person make investment choices?
Examining the most common investment options
Important considerations before making a choice
Should a person make investment choices?
Defined contribution schemes in addition to personal and stakeholder pensions all require the holder/contributor to make decisions relating to where the money is invested.
It is the task of pension providers to simply the decision-making process as much as possible. The scheme participant is traditionally presented with a range of fund investment strategies, they are then expected to make a choice, the options are devised in such a way as to be suitable for a broad-spectrum people. In the event that a person does not make a decision, there will be a default fund that will detailed to satisfy the broadest range of people possible.
Defined benefit pension schemes
Members in a defined benefit scheme (mostly in the workplace) are not directly responsible for the investment decisions. This type of scheme declares that you will receive a retirement income, it is up to the employer to make the choices relating to investment and be responsible for the risks necessary for funds to reach the target. The caveat is that employees will not have total separation from any investment decisions; these opportunities are likely to be less frequent than those in other pension schemes. Employees can decide to increase the contributions made to a defined contribution scheme in order to boost their retirement pension pot.
Examining the most common investment options
Defined contribution plans are designed to accommodate a range of investment funds, the money that is paid into them are then invested in varying ways through the years of employment all the way until retirement. The individual is required to choose either a single or selection of funds that fulfil the needs of the preferred investment strategy. The finer details, including the choice of specific assets that funds will be invested in, will be handled by the fund investment experts.
There are several primary categories where funds are usually invested in covering shares, bonds and cash.
Most scheme members are offered a choice of funds:
Focus specific assets
Shares in European companies
A spectrum of varying assets
Government bonds and global share markets
Risk Management
A substantial majority of people prefer to invest their pension into the second option as this spreads the risk potential through diversity. There are opportunities for the individual to diversify the fund investment themselves, this of requires more personal time and should be supported by a competent repository of financial knowledge.
Funds that evolve over time – Lifestyle and Target date
When comparing each investment fund performance, shares have predominantly out performed lower risk investments like bonds or cash over long periods of time. A formidable number of pension plans incorporate a ‘lifestyle’ fund management system, this is where funds are automatically transitioned over time to decreasingly lower risk assets (e.g. bonds and cash) the closer a person moves towards retirement. The movement of the funds is under the management of the fund’s investment experts. The benefit of lifestyle funds is knowing that when you invest in one, you can have a strong degree of confidence that your investments will match your desired level of risk with the added bonus that the individual doesn’t experience the hassle of constantly having to monitor the market which may cause them to rebalance their portfolio.
Target date funds could be called referred to as a cookie cutter investment strategy for investment, whereas lifestyle funds tend to favour individual investor needs. That being said it is important to carefully consider the implications of the chosen strategy, moreover when lifestyle funds are used as a primary long-term investment.
Important considerations before making a choice
Do not make your investment decisions over-complicated. Investing for the long term is the correct strategy, take note that only choosing lower risk investments such as cash or bonds will not yield the growth that you might want. Shares have a higher risk factor, that being said they have a track record of outperforming the first two investment options. Diversification is a means of mitigating risk, essentially not placing all of your eggs in one basket. There are a selection of standard managed funds that incorporate diverse investment strategies and this may suit a number of people that will choose not to spread their money further.
It is worth looking at the fees and charges associated with fund management, it pays to shop around for competitive deals with comparable features.
Perform and annul review of your investments
This does not mean that you have to make any changes, it is important that you are able to have knowledge of the performances to see if adjustments are necessary to ensure your project funds are on track with your expectations. The closer you are to retirement, the more aware you should be on the status of the investments. The correct strategy during later years is to move the fund into safer options that are low risk in order to protect them from any unforeseen market shocks. Some individuals will use their pot to buy a guaranteed annuity, this will give them a fixed income (inflation matched) for the retired life, and others may choose to have a flexible income drawdown pension. Those who choose the latter will need to work a strategy that favours long term investment.
Self-investment choices
With a significant pension pot, individuals are able to take even greater control of their pension and make available a wider range of assets through the use of a SIPP (self-invested personal pension)
*This option is advised to be taken only by experienced investors who are comfortable with making investment decisions or who are in a trusted relationship with a proven financial adviser.
Explaining the self-invested personal pension
This type of pension is akin to a bag containing all your investments until you reach retirement and decide to draw an income from it. This is a type of personal pension and had many similarities to a standard personal pension. The most significant difference is that the person paying into the scheme has greater flexibility over the investments they choose. SIPPs are not for everyone and should only be taken under reliable advisement or by having the fund managed by an authorised investment manager who will then make the decisions for you.
The format of SIPPs are established to allow people the absolute right to manage their own fund and the finer details such as switching and altering the investments in a way that suits their circumstances and preference. It is important to remember that SIPPs in general have slightly higher charges than other personal pensions as well as stakeholder pensions. This is the main reason that a SIPP is more suited to larger funds and for those who are experienced in investing.
What are you allowed to invest in with a SIPP?
Government securities
Insurance company funds
Unit trusts
Individual stocks and shares quoted on a recognised UK or overseas stock exchange.
Investment trusts
Traded endowment policies
Some National Savings and Investment products
Deposit accounts with banks and building societies
Commercial property
(e.g. offices, shops or factory premises)
This is not a comprehensive list concerning the investment options for SIPPs, there will be other avenues available through different SIPP providers.
The tax advantages usually related to pension investments are not applicable to a SIPP with respect to residential property, therefore the holding of any such property in this category is disqualified from being held within the pension scheme. There are circumstances with some restrictions where residential property can be contained in the SIPP as long as they are classed as real estate investments, in this case the tax advantages will be retained.
When can the money in a SIPP be accessed?
April 2015 introduced new rules, these allowed people to access and use the pension pot more flexibly from the age of 55
Tax relief on pension contributions
Instead of money going to the government from tax, more of it goes into your pension. A person is permitted to pay as much as they want into a pension fund although there are both annual and lifetime limits on how much tax relief they will receive on their pension contributions.
Annual pension contribution tax relief
As a UK taxpayer in the current tax year 2020-21, you can receive tax relief on pension contributions up to 100% of your earnings or £40,000 annual allowance, whichever is less. Contributions that fall outside of this limit will not be permitted for tax relief and will therefore be added to your other income and subject to respective income tax rate that applies to you.
The better news is that any unused allowances can be carried over from the previous three years just as long as the person was a member of the pension scheme during those years.
The exception to this rule comes into effect when a person takes an income from a defined contribution scheme, in this scenario the annual allowance can be reduced to as little as £4,000. Note that since April 2016, the annual allowance is also diminished if a person’s income exceeds £150,000 inclusive of pension contributions.
MPAA – Money Purchase Annual Allowance
The main circumstances in which the MPAA is activated are:
Taking an entire pension pot as a lump sum or the taking of ad-hoc lump sums out of the pot
Transferring the pension pot into a flexible income product (pension drawdown) and then starting to take an income
Purchasing an investment linked or flexible annuity where income could go down
Any pre-April 2005 capped drawdown plan where payments are received that are in excess of the cap
How not to activate the MPAA
You can take a tax-free lump sum and purchase a lifetime annuity to provide a guaranteed income for life. The amount of income will either stay level or increase.
Receive the tax-free lump sum and put the pension pot into a pension drawdown option (flexible income product), however you must not take any income from it.
A person will be allowed to cash in micro-pension pots that are less than £10,000
MPAA will only apply to contributions that are paid into defined contribution pensions, it will not be applicable to any defined benefit pension schemes.
Is there any tax-relief for non-tax payers?
For cases where people have no earnings or they are less than £3,600 a year, it is possible for money to be paid into a pension scheme and have tax relief added to the contributions, there is a limit of £2,880 per year.
Should a person pay in the £2,880 during the year, tax relief is added to the contribution that will make it up to £3,600. This applies to people who pay into a stakeholder or personal pension though not through an employer’s scheme, there are some workplace pension schemes that will accommodate tax relief
What is the maximum amount that you can store in a personal pension?
The top-most limit defined by the lifetime allowance is £1,073,100 (this figure accurate for the tax year 2020-21). Any amount above this is subject to a tax deduction of 25% when paid as income or 55% should it be paid out as a lump sum.
Before people retire, they generally have things they want to do outside their work life, this might include raising a family, travelling to new destinations, furthering their personal skill set and education as well as those of their children.
Whilst saving into a pension is a key fundamental saving system that every working person needs to think about and be involved with, there are of course questions raised about short and midterm investment schemes that can enable clients to realise personal goals before retirement. It is by no means uncommon for employed people to have more than just their defined benefit pension. The contribution towards a personal pension allows a greater flexibility over retirement options than would be held by a person with just one pension scheme in place.
Retiring earlier than a defined benefit pension scheme stipulates
Drawing on a defined benefit pension before the scheme’s retirement age is either disallowed or is likely to incur a substantial penalty with respect to the amount of income that can be successively withdrawn from the pension. In order to bridge the gap between early retirement, many people set their sights on working part time with a supplemental income provided via a personal pension pot or the purchase of an annuity product.
Saving and Investment
The problem with pension schemes is that there is a minimum term limit or a point at which you can withdraw an income, this is fine for that long steady growth saving pot but what about if a customer wants to save, see some fund growth and then extract the money for a desired use.
There is a false misconception held onto by some that it is sometimes too late to invest or put aside extra for their retirement. It doesn’t matter if the day of hanging up your work clothes is five, ten, twenty or more years in the future, it is always worthwhile investing for tomorrow. Doing this will enable you to reach that day with confidence in the knowledge that you have taken the right steps to provide you with an income that will enable you to do the things you like doing when you are no longer earning.
What will Credencis do for me?
The years of working experience in the pensions and savings industry have provided a wealth of accumulated knowledge that we use to help people who are planning for their retirement. Organising an income for retirement can be a complex and protracted task, Credencis can give you the informed, expert guidance to lead you through the steps.
Our advisers will present financial solutions and with your agreement, implement them for you, taking care of the necessary paperwork.
All clients are invited to have a free obligation discussion to discuss particular needs, questions and ultimate goals. The purpose of this type of meeting is to discern the best course to take in order to achieve fulfilment of your expectations.
Credencis can carefully analyse your financial situation in comparison to your goals, this will identify any adjustments that might have to be made in order for them to be realised.
Our advisers remain connected with our clients as an ongoing commitment of service, this is to ensure that your financial plans remain on track, and if need be, modified to accommodate changes in life.
Need advice? We can help.
Just a thing to remember, the initial consultation doesn’t cost you anything, so by all means, feel at ease to ask a question to one of our advisers