Personal Finance Clinic: The Dangers of DIY Pensions
Plenty of pension providers offer do-it-yourself pensions. Here, the responsibility for consolidating schemes and investing the proceeds lies with the consumer. It sounds easy and convenient and it’s usually cheaper than other options, but there is an awful lot that could go wrong.
The pension providers offer consolidation services to bring all of your old pensions together into a single pot. This is often a good thing to do, but older pensions are not the same as newer schemes. Sometimes, by consolidating your older schemes, you can end up losing out on some very valuable benefits.
Guaranteed Annuity Rates
Older pensions could include guaranteed annuity rates. Some can be very high, promising you a much larger regular pension income (guaranteed for life) than you could secure by shopping around. Transferring the pension usually results in this benefit being lost.
Higher Tax-Free Cash
Usually, you can draw 25% of an invested pension as tax-free cash. For some older schemes, however, the available tax-free cash can be much higher than this. Transferring into a new scheme usually means forgoing the higher tax-free cash allowance.
Market Value Reductions
When a pension is set up, a normal retirement date has to be specified. This is the date that you say you want to take the pension. Most people will choose 60 or 65, although in practice you are not typically forced to start accessing your pension at the normal retirement date. However, you may wish to consolidate the pension before you reach the normal retirement date. In this case, the scheme can apply a market value reduction to your pension to protect the remaining members of the scheme. In other words, they can reduce the value of your investments or withhold a large portion of your investment returns (possibly as much as 20%), only applying it to your pension when you reach the scheme’s normal retirement date. Transfer out early and risk losing this chunk of cash.
Investing is Not Quick or Easy
There’s an awful lot of information out there, recommending various funds to invest your money in. You can normally sign up for market tips and other such updates, but you might not want to spend 15 hours a week researching investments and reading about macro-economic politics. You probably have enough to do with your own job and family commitments. Or if you are retired, you may actually want to enjoy retirement. Without proper research and a tried and tested methodology for investing, which takes into account your risk profile and time horizon, it’s easy to get things very wrong. If you don’t have very long until you want to start accessing your pension money, getting the investments wrong at this late stage can be devastating.
Can You Get the Tax Right?
When clients come to see us, they are often amazed at how well we understand pension and taxation rules. Often, we can design a bespoke pension withdrawal strategy for clients, taking into account their income needs and other sources of income they have alongside their pensions. In many cases, we can alter how they draw an income in order to save significant amounts of tax. The client still receives the exact same amount of income, but the tax they are paying is heavily reduced, sometimes to nil. If you are looking after your own pension account, it will be up to you to decipher pension and tax rules in order to reduce your tax burden.
Speak to an Adviser
Financial advice is not free, of course. But, a good adviser will be more than worth their fees. Over time, they will save you money and anguish by protecting you from consolidation mistakes, they will invest your money in a way that best suits your needs and they will save you from handing over more money to the Tax Man than is absolutely necessary. Moreover, they are there to listen to what your real goals in life are – and to assist you in achieving them as soon as possible, helping you protect your family along the way and keeping you up to speed with ever-changing rules and legislation.
Too often, a client will come to see us after something has gone wrong. For example, they did a DIY pension consolidation and lost a lot of money. It’s far better to see a financial adviser before taking action yourself. They can provide you with the benefit of their experience and qualifications to stop you from losing money.
Initial Consultation at No Cost to You
Fiducia Wealth Management offers all prospective clients a free initial meeting. There is no cost to you and no obligation, so why not give us a call?
If you would like to know more about how we as Financial Advisers can help you with your Pensions and overall Retirement Planning then visit the Retirement Planning section of our website: Retirement Planning or send us email at: firstname.lastname@example.org
The information contained in website is for guidance only and does not constitute advice which should be sought before taking any action or inaction. The information is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly no responsibility can be assumed by Fiducia Wealth Management Limited, or any associated companies or persons, its officers or its employees, for any loss occasioned in connection with the content hereof and any such action or inaction. Professional financial advice is necessary for every case.
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