Whenever you decide to retire, there is a world of pain and complexity ahead, unless you are lucky enough to be on an increasingly rare defined benefit or final salary pension scheme. There you go. A whole lot of jargon, straight off the bat, which is unfortunately the problem with the retirement and pensions industry.
Understanding pension jargon
The pension industry is riddled with acronyms and complexity designed to confuse even the most ardent investment enthusiast and they save the worst terminology for retirement itself. I’m going to mention just a couple: UFPLS and sequencing risk. Any ideas?
For the record, UFPLS is the acronym for Uncrystallised Funds Pension Lump Sum – a term as impenetrably confusing as it is vital to understand. Sequencing risk is the very real danger of losing a lot of the value of your pension pot when you start spending it in retirement due to unfavourable markets.The point I’m trying to make is that these are two of countless elements of your pension that are important to know about and understand, and with the best will in the world, it is highly unlikely that mere mortals will ever grasp even the basics.
At this point it is worth mentioning even more pensions jargon: defined benefit (DB) or final salary pensions are an old-style pension that essentially pay a usually generous amount of money to the benefactor until they die. A lot of people think that all pensions do this, but they don’t. Defined benefit pensions are still around, particularly in the public sector, and if you have a pension like this, it is a very good thing if it hasn’t lapsed. Check out the terms of that pension, if you have one of these, or speak to a financial adviser if you’re unsure about what you have.
Most pensions nowadays are what are called defined contribution (DC) schemes and all auto-enrolment pensions fall into this category. The big and important difference between these schemes and a defined benefit (DB) pension is that all these do is accrue a pot of money that you can access after you’re 55 years old and take up to 25% tax free. The onus is on you to make this lump sum last for the rest of your life and remember, it will be taxed as if it were income like a salary.
Tony Clark, Senior Propositions Manager at St. James’s Place, says, “There will be many people who will have a mix of DB and DC pensions, which can add extra layers of complexity. Don’t be put off though; what you now have is a huge amount of flexibility, but it does mean the individual has the responsibility to make informed choices to get things right.”
Do I have enough to retire with?
Most UK retirees just haven’t saved enough for retirement, but there are some smart ways to increase the value in your pension at retirement and avoid some of the costly errors people make. To get the most from your pension, it is absolutely worth engaging the services of a financial adviser. They will be able to guide you through the minefield of pensions and retirement. Even if you’ve never used a financial adviser before, if you’re in your 50s or even early 60s, you should seriously consider tracking an adviser down for the following reasons:
- You’ll probably never have had more money in your life than what’s in your pension pot as you approach retirement, and the stakes are high. Don’t take risks with it.
- The number of scammers targeting people with their pensions are at an all-time high. Make sure you’re being looked after by a professional.
- The decision of when to actually retire is important and potentially irreversible. Having an experienced adviser by your side (who’s travelled the road before countless times) is extremely useful.
- The tax issues around retirement are complicated. An adviser will be up-to-speed with the latest rules.
- As most of us have a defined contribution pension, a really robust financial plan is required to deliver the lifestyle you want, throughout the duration of your retirement. A financial adviser will be able to create a plan with you (but even the best of them won’t be able to predict how long you’ll last!).
- If the cost of engaging a financial adviser concerns you, then think of this. Making just one common mistake with your pension (e.g. disinvesting your pension and moving it to a deposit account) is likely to cost you many times more than the fees charged by an adviser. This is just one of the bear-traps that a professional will stop you falling into.
- Finally, there are wills, inheritance and tax-efficient ways of passing on any of your remaining wealth to your loved-ones that an adviser will assist you with.
Don’t lose your hard-earned cash
To use an analogy, would you really consider voyaging up the Amazon river and through the rainforest on an epic journey with just Google maps? Most people embarking on a perilous journey would always use an experienced, local guide. Whereas a lot of investing isn’t a perilous journey, the retirement journey really is hazardous. Losing money at retirement, with no real way of earning more money to make up for your losses, will have a fundamental impact on your life, leading to lower standards of living and the potential for a real hand-to-mouth existence.
You owe it to yourself to seek out a professional to see you through the treacherous waters of retirement.
This article was sponsored by St. James’s Place.
Photo by Vadym Stepanchuk on Canva