Pension Management

Pension planning is one part of the retirement planning process. A pension plan is perceived, incorrectly by many, to be the sole mechanism to achieve an acceptable sustainable level of income in retirement. But it will form a core element.

Many people are very pro-active in pension planning, some started off by doing so, and some have become disillusioned as other forms of savings and investment became the priority.

With substantial tax advantages, pension planning is still the most important way of supplementing state benefits on retirement. With employers also offering “ free” contributions, many people often find that they have accumulated funds sitting with different pension companies. Unfortunately, as a recent survey conducted by Baring Asset Management confirmed, over half the working population had even done any pension planning, and only 37% know how their money was invested.

Here are some of the common scenarios financial advisers find:

The vast majority of people who take out a pension feel that their pension planning process is complete, come back in forty years time and they will have huge big pot of money giving them what they wanted. A bit like buying a car and keeping it for that period of time without servicing it!

They started, and stopped making contributions into a plan with a company that is no longer in existence, or is closed to new business, so that it does not remain competitive.

As the pension was taken out many years ago, the charges might have been exceptionally high as modern day plans have become more transparent, and the rules relating to the giving of advice more consumer orientated.

On the other side of the coin, some of the older plans were started when annuity rates were high, and contain valuable guarantees which should not be lost if pension planning is recommended. Pension Planning processes are only effective when regular reviews occur, and these should become more regular the closer the retirement date.

The credit crunch should have proven to all investors and pension holders the need t oplan thoroughly, review regularly, and take action accordingly. Otherwise, twenty years of pension planning and investment planning will have been to no avail.

Copyright © 2009

Before considering whether it is a good idea, it might be helpful to take a quick look at just what is pension drawdown.
Replace that “drawdown” with “withdraw” and it can perhaps be most readily understood as the ability to withdraw money from your pension fund and leave the balance invested, so that (hopefully) it continues to grow. This ability therefore gives the pension holder an additional option on retirement: instead of using the pension for the one-off purchase of a lifetime annuity, funds can be withdrawn or drawn down for the purchase of an annuity at a later date. And the later the date, of course, the more attractive the annuity should be. Tit does mean, however, that you will probably need an alternative source of income in the meantime.
Clearly, this will give you a much greater degree of flexibility in the use of your pension and preserves the opportunity of a remaining pension fund that you could pass on to your children on your death (provided, of course, that the fund is still a reasonably significant amount).
If the pension fund is sufficiently large, you will be able to draw down income and continue to manage the balance of the fund, making any necessary investment decisions for yourself. In other words, it allows you to stay in control of a significant source of savings and investment.
Pension drawdown could also result in your being able to increase your income when you are older. Obviously, this will depend not only on there still being a sizeable balance in the pension fund, but also that the investments perform well. The opposite is also true, of course. If the investments do not perform well, then the fund can become seriously depleted and the income in your old age could in fact be significantly reduced.
Pension drawdown thus offers a more flexible alternative to purchasing an annuity as soon as you retire. This will suit those people who feel that the one-off purchase of an annuity at too early a stage locks them into an arrangement which might not represent the best deal over the longer-term. They might also be concerned about the relatively limited death benefits that come with many annuities.
From the foregoing, therefore, it can be seen that there are attractions to a pension drawdown. But these attractions come at a price. And that price lies in the risk of things going wrong or you miscalculating a number of factors. In other words, pension drawdown represents a risk. If the worst came to the worst, your decisions could leave your remaining pension fund seriously – if not totally – depleted. This would leave you without a private pension at all in your old age.
The risk is sufficient, certainly, for it to be very unwise to consider this retirement option without first consulting an experienced independent financial adviser, who can warn you of the pitfalls and carefully explain not only the attractions, but also the drawbacks of a pension drawdown.

Everyone knows that the younger you are when you start paying into a pension, the more you’ll receive when it’s time to pay out on your retirement. Nevertheless, there are still many who delay making that start and a frightening number of people who believe that their entitlement to a basic State pension will be enough to see them comfortably through old age. While they might be right about the entitlement to a State pension, they are most unlikely to find that the State pension alone will ensure anything like a comfortable retirement. But if taking care of your own pension arrangements is to be an option, where do you go for the best pension advice?
Even a cursory look at the subject of pensions will tell you that it can become a pretty complicated topic, with a bewildering range of different products, to suit different ends and purposes. For example, you might be aware that your employer runs a pension scheme and, indeed, you believe that the employer contributes to your pension on your behalf. But is this an occupational pension scheme. If it is, do you know whether it is salary-related or whether it is a defined contribution or money purchase scheme?
Alternatively, is your employer offering a stakeholder pension scheme or running a group personal pension scheme? You have heard that it is possible to set up your own stakeholder pension. How would this differ from your having your own personal pension arrangement? Is one or the other – a stakeholder or a personal pension scheme – something you should be setting up for yourself?
These are all perfectly reasonable questions, but how on earth do you go about answering them? It’s very much a specialist subject and the ground rules seem to be changing all the time. You have might also have heard, for example, that the government is introducing changes requiring all employers to offer a pension in the future and to make contributions to the schemes set up. This can be the employer’s own scheme or the government’s new central scheme that is being established.
Yet further changes will affect the minimum age at which you can start drawing your pension benefits. Subject to the rules of your particular scheme, the minimum age is currently 50, but this will go up to age 55 by the year 2010 (though you will no longer need to stop working altogether to be able to draw the pension, provided continued employment is allowed by the rules of your particular scheme). To phase in the higher age level, pension fund managers have been given the period from April 2006 until April 2010 to raise the age limit. Clearly, you will need to know when it applies to you.
All in all, therefore, it is clear that questions about pensions can become quite complicated. They are further complicated by your need to know exactly how your own individual circumstances should affect your pension options and decisions. A pension is a long-term investment, which accumulates many thousands of pounds of your hard-earned cash – it’s important, therefore, that you are guided towards the right decisions.
Given the importance of getting it right, the sensible course of action is to consult an independent financial adviser about your existing and future pension options. This will ensure that your decisions are based on the best, professional and expert, independent pension advice.

Despite the quite considerable contributions individuals are likely to be making to them and the accumulated value they are likely to have, it is surprising how few people keep an eye on how their pension fund investments are doing. The contributions are made on the same monthly basis, come what may, regardless of the investment’s comparative performance. It seems that many people give no thought to the possibility of pension transfers and whether such a move would make sense for them.
Whether a pension transfer is something you should be considering, of course, will depend on the performance of your current pension fund. Together with your home, this is likely to be one of your larger investments and, as with any investment, you will want to make sure that your hard-earned money there is working as hard for you as it possibly can. With the value of your home, for example, you probably follow every twist and turn of local property prices and keep a fairly close watch on just how much it is worth. How many people do the same with their pension investments?
With your pension fund, it is not just the overall value and performance you will be interested in. Have you recently reviewed what management or administration fees you are paying? Could you get a better deal for less?
Ready to transfer?
If you believe it is time for a change, there are one or two things you should definitely do first before committing yourself to a transfer:
- Above all, do not consider transferring your pension without seeking the expert advice of a registered independent financial adviser;
- If you have not done so already, one of the first things your adviser will ask to see is a transfer value analysis. As the title suggests, this is an analysis which allows you to compare the value and performance of your current pension investments with the alternatives. It should include a figure called the “critical yield” (typically somewhere between 7% and 11%) which tells you how fast any replacement scheme would need to grow to match the performance of your present scheme. A good rule of thumb will be a figure of 8%. If your present scheme is returning anything less than this, then you might want to take the idea of a pension transfer further;
- What are your intentions regarding retirement? When do you hope to start drawing on your pension? If you are planning to retire early, for example, you will need to ensure that any replacement scheme to which you are intending to transfer is sufficiently flexible to allow this;
- With the help of your independent financial adviser, you will naturally want to check again the current financial position and performance of your present scheme. In the event that it is showing a surplus, with a higher value on assets than liabilities, then it could well prove worthwhile staying with your present pension fund.
Summary
It is certainly worth reviewing and monitoring your pension fund in the same way that you would any other investment, to consider the potential benefits of a pension transfer:
- Financial performance, management costs and flexibility might be a useful basis for comparison;
- Before doing anything, however, make sure that you seek the services of a reputable, independent financial adviser;
- Get a transfer value analysis of your current pension scheme;
- Take into account your actual retirement plans and any intention you might have to retire early.

One of the reasons for searching out the services of an independent financial adviser is that pension matters are awash with esoteric terms, labels and descriptions. The self-invested pension – or Self-invested Personal Pension (Sipp) as you’ll often see it called – is a good case in point. The underlying principle is relatively straight forward and attractive, but to make the most of the opportunities it represents, it really is essential to take expert advice especially if you are considering transferring to a self-invested pension from an existing pension scheme.
What it is?
A self-invested pension shares the same basic features as any personal pension plan regarding such things as eligibility, contributions and tax relief. Instead of pension contributions being paid into an insurance policy investment however, the self-invested pension remains very much in the hands of the pension holder, even when it comes to making the investment decisions. For example, the holder can choose to invest in anything from individual shares to unit trusts, gilts, traded endowment policies, residential or commercial property and even investments in art or vintage wines.
In other words, it is the pension holder (or his financial adviser) who can make the investment decisions, rather than being tied into the insurance company’s investment portfolio in a conventional personal pension plan. If the self-invested investments are not performing as expected, therefore, it is a relatively straight forward matter of switching to higher-performing investments.
Provided you earn more than £30,000, you can also operate a self-invested pension alongside a regular occupational pension.
As with all other personal pension plans, you will not be able to draw on a self-invested pension plan until you reach the age of 50 (or 55 after the final implementation date of April 2010). Until retirement age, however, you will be allowed to contribute to your self-invested pension as much as the equivalent of a year’s salary, less any contributions you might be making to any other pension plans. As with other personal pension plans, you earn tax relief on your contributions. Effectively, therefore, for every £1,000 that is invested, you only pay £780, with the remaining £220 being paid by the Inland Revenue in the form of basic tax relief.
Self-invested pension plans have also become rather more accessible these days to a wider number of people. It is possible to set one up, for example, with a monthly contribution as little as £50, or if you are transferring from another pension, a transfer value of as little as £5,000.
Summary
A self-invested pension puts more of the investment decision cards in your own hands. You can keep a personal control over the investment strategy or appoint a financial adviser or fund manager to make the investments for you.
For those who want an active, hands-on approach to their pension management, there will be decided attractions in a self-invested pension. Nevertheless, as emphasised previously, the decision to set up a self-invested pension or to transfer funds to one from an existing pension scheme should not be taken without first consulting an independent financial adviser.