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Six reasons you need to take ownership of your pensions

Depending on your age, after your home, pensions savings are quite likely to be the second biggest asset you own. But, if we’re not already helping to manage your wealth, pensions can be surprisingly easy to neglect.

You might only hear from scheme administrators once a year, and that’s assuming they’ve got your current address. Equally, it’s easy to not pay much attention to the contributions coming out of your salary each month.

No matter what stage of retirement planning you are at, paying closer attention to your pensions now will help increase financial security later in life. Remember, even though you can’t touch it until you’re 55, it’s still your pension. It’s important to take ownership of these lifetime savings!

Here are six reasons why.

1. So you don’t miss the tax-benefits

For starters, you get tax relief on contributions you pay in. If you make payments out of your salary before-tax you receive relief at your highest marginal rate of Income Tax. If you make payments after-tax, scheme administrators will automatically add basic-rate relief. So, a £100 contribution effectively costs you £80. Higher or additional-rate income taxpayers can then reclaim the remainder on their tax return.

Once invested, your pension will then grow free of Capital Gains Tax.

Come retirement you typically receive 25% of your pension tax-free. Then, if you die, pensions can be exempt from Inheritance Tax too. It really is a no-brainer.

2. To make sure you’re not over-funding

There are tax-efficient limits to the most you can pay in and the highest value it can be.

The Annual Allowance is either the equivalent of your income, up to a maximum of £40,000. However, if you earn over £150,000, for every £2 over, your Annual Allowance is reduced £1. There is a rule called Carry Forward available, which means you can utilise unused allowance from the previous three years, but things start to get quite complex.

If you accidentally pay in more than your Annual Allowance, expect a tax-bill from HMRC!

Then, the largest value your pension fund can be without triggering tax is £1.055 million this tax year. This is called the Lifetime Allowance. If you exceed it, you would potentially be required to pay:

  • 55% tax on lump-sum withdrawals
  • 25% tax on regular income

Keeping an eye on these two limits is vital, especially if you have multiple pension schemes. It’s your responsibility to ensure you don’t over-fund your pensions – there are usually no warnings if you are getting close!

3. To track down forgotten schemes

You’re more likely than ever to have multiple jobs through life. Perhaps even a complete change of career. If you were a member of old workplace schemes and they’ve slipped your mind, tracking them down is key. It’s your savings remember!

Most scheme administrators must send you an annual statement, but if you’ve moved to a new house and not notified them then they can be easily forgotten. To track a lost pension scheme down, there are three people who can help:

  • The pension provider, assuming you remember who they are
  • Your former employer, if it was a workplace scheme, or
  • The Pension Tracing service

4. To regularly review fund choice and risk profile

Previous research from Hargreaves Lansdown found that the default workplace pension fund, which many people are invested in if they hadn’t specified otherwise, underperformed the most popular funds by almost 5%.

The primary reason is that default funds are usually risk-averse, as a ‘one-size-fits-all’ solution. They typically have a lower percentage invested in equities, compared to funds with more risk and a better potential for returns.

Your attitude to risk should dictate which funds you are invested in. Your risk profile should also be reviewed on a regular basis, along with your investment funds, to ensure they remain appropriate.

5. To check you qualify for the full State Pension

Your State Pension forms a solid foundation for retirement income. To qualify for the full amount, you need to have paid 35 years of National Insurance contributions. To check what you are entitled to, you can find out here.

6. So it lasts your lifetime

And potentially beyond, if you’d like to leave a legacy to your family!

Pension Freedoms which were introduced in 2015 means you can spend as much of your pension, however you like, after age 55. An Annuity is no longer the default, you can make flexible regular withdrawals and/or take lump sums.

The issue here is that you are now responsible for ensuring you don’t run out of income, whereas previously that risk was taken on by the Annuity provider. We can really help here with cash flow planning, which graphically represents a range of influences on your wealth over your lifetime.

What’s our pension planning process?

We understand that whilst you must take ownership of your pensions, some people either don’t have the time, experience or inclination to do so fully. That’s where we come in.

As Chartered independent financial planners we take time to understand aspirations, objectives and desired retirement lifestyle. The first meeting is all about you, not your money.

Then we review your existing pensions, savings and investments, making sense of your current financial situation and what it means for your future. We show you how your existing assets, and the new Pension Freedom rules, can be used to help you retire early.

We make recommendations and build a robust financial plan that will act as a step-by-step guide to achieving your objectives. Then we work with you on an ongoing basis, through retirement and beyond, to ensure you meet them.

Working with us will equip you with confidence for the next chapter of your life. Not only will you feel more informed about your current financial situation, but retirement will become a secure, realistic and exciting prospect.

What do our clients have to say?