Personal pensions have become something of a mystery in recent years, as successive governments have continually changed the rules. However, the reality is that pensions have been, and remain, a tax efficient way of saving for retirement and should be a high priority when planning for your financial future.
Many people acquire several personal pension plans or company pension schemes as they move from job to job. This can lead to a disparate collection of pension arrangements that are difficult to keep track of and, in some cases, represent poor value for money (so-called ‘Zombie’ or ‘Dinosaur’ funds in particular). One solution is to consolidate previous arrangements by transferring to a single provider. This makes it easier to monitor your investments and manage everything from a single point of control. It can also give you flexibility and control unavailable through your existing providers. However, transferring is not always the best option, particularly if you have accrued benefits through a previous employer’s final salary scheme, and should only be considered once a thorough analysis has been conducted.
For many people, the traditional method of purchasing an annuity (usually in the form of a lifetime income) may not be the best option. If you have a personal pension, you will have much flexibility in terms of when and how you access your retirement benefits. An alternative is to leave the bulk of your pension fund invested, and withdraw as required. This gives you more flexibility and control.
After the matrimonial home, pension benefits can represent the most valuable asset. In any divorce settlement, accrued pension benefits will be taken into account, including company schemes, personal pensions and additional state pensions (but not basic state pensions). There are several options for splitting pension rights, and it is vital to take specialist advice to ensure a mutually beneficial arrangement.
SIPPs are simply personal pensions with wider investment powers than ‘off the shelf’ pension products. SIPPs offer greater investment flexibility, so if you desire to use your pension to invest in commercial property, self-manage a stocks and shares portfolio, appoint an asset manager to look after a portfolio for you or look at alternative investments, you’ll need to consider a SIPP to facilitate your investments.
As you approach retirement, any pensions or other investments you may already have in place will take on more significance. For years, they may have been intangible because retirement is somewhere over the horizon, but as it draws nearer, it is essential to take stock and formulate a financial game plan to understand your options and ensure that you have sufficient income for when you cease working.
If you require a fixed level of income from your personal pension, it may be worth considering purchasing an annuity. This, which you would purchase with the capital built up in your pension fund, would provide a pre-determined level of income from a specialist annuity provider. There are various types of annuity available, including ‘enhanced’ annuities for those with certain medical conditions. Although annuity rates are comparatively unattractive, they may be worth considering for at least some of your pension capital – especially if you need the security of a guaranteed level of income in retirement.
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