How well is your current UK pension plan performing?
UK Pension reviews
You may not be appreciative of the importance of reviewing your UK Pension scheme on a regular basis, principally since the UK Pension Freedom reforms of 2015 gave people more choices for accessing their retirement savings than ever before.
Tax relief on contributions determines that you are entitled to %pound;20 for every %pound;100 invested and potentially even more if you are a Higher Rate Tax Payers meaning UK pensions are an effective way of accumulating income for use in your retirement.
You could be enrolled in a older plan with a specific funding pattern and investment approach in mind, it’s possible to assume that everything’s ticking along as expected However, newer plans may offer you are better future.
If you enter retirement without reviewing your pension schemes and investments, the sum accumulated may not live up to your expectations.
What is a pension review?
A pension review is where your current pension scheme or schemes are examined to determine their current performance. These reviews are reviewed by regulated financial advisors.
The process will look at how much your pension funds have grown, how that compares to other similar pensions, what is it invested in and how much risk does this expose you to, does it have access to the benefits of the 2015 Pension reforms for example, can you take tax free cash at 55 instead of at your retirement date? Do you have to take an annuity? Can you drawdown and does the fund die with you or can it be inherited by your loved ones?.
What does the pensions review process involve?
During a pension review, a regulated financial advisor will examine your pension and investment products to see if they are performing as well as they could be.They will look for:
Underperforming investments and/or expensive management fees that are restricting your financial goals
If your current pension products fit with your current risk profile
If they are currently on-track to meet your retirement income goals by a desired age
Whether you should consolidate your pensions or keep them as single pots
Why do I need a pension review?
Your pension is possibly your main income when you retire. You need your pension to be as good as possible to give you a comfortable lifestyle.
If you joined a scheme for many years which has been following the same investment approach since day one, you may find that your pot may not have accumulated enough funds to support you during retirement as your lifestyle has changed through the years.
This is the benefit of pension reviews. For example, you could find that the 5% you’re paying in annual fees for three separate pension funds could be transferred into one single fund with lower management fees, therefore reducing annual fees.
Similarly, a pension review could reveal that your original options are performing poorly, and that by transferring to a different pension plan, your funds could grow at a faster rate. This could then be reviewed again the following year.
If you miss taking advantage of fund growth for even a few years, it could have a huge impact on the future value of your pension pot and therefore your retirement income.
What UK pension types can be reviewed?
Either, Defined Contribution (DC) pensions or Defined Benefit (DB) pension
Defined Contribution (DC)
With a Defined Contribution pension, both you and your employer contribute funds into your pot. The amount you get will depend on how much has been paid in, how much tax relief you’ve received, and how well your investments perform. It’s really your own personal investment fund.
Before the Pension Freedoms Act of 2015, you were forced to use the taxable 75% of your pension pot to buy an annuity. Now, however, those with a Defined Contribution pension have the freedom to access their pension from age 55 and do whatever they want to with it.
Defined Contribution pensions can be: Personal pension schemes, Stakeholder pensions, Self-invested personal pensions (SIPP) or Schemes used to contract out of SERPS.
With a Defined Contribution scheme, you can opt to switch or transfer your pension to another provider. A switch is just moving your benefits from one Defined Contribution provider to another. A transfer, is transferring a money purchase scheme to a personal pension.
Capped drawdown vs. flexi-access
The Pensions Freedom Act also saw capped drawdown pensions close to new applicants in 2015. If you decide to take out 150% of your annual income from your capped drawdown pot, it will automatically transfer into a flexi-access account. Otherwise, you can choose to convert it yourself.
Defined Benefit (DB)
With a Defined Benefit transfer scheme rather than having an individual pot just for yourself, you pay money into a scheme which will pay you an income.
Defined Benefit pensions which are sometimes named final salary pensions typically come from public sector jobs or large private companies, and your pension amount increases based on the number of years you’ve worked there and your salary amount.
You can ask for a review of your Defined Benefit pension, though if you do want to transfer your funds out, you’ll need to get a cash equivalent transfer value, this is a lump sum in exchange for you giving up a pension from the scheme.
You will then need to move it into a Defined Contribution pension.
You will have to seek advice from a regulated financial advisor if your pot is worth more than £30,000. Only an adviser can carry out the transfer as the FCA do not allow individuals to do it without proof that professional advice was given and the recommendation is to transfer.
Why is it important to review my personal pension?
A personal pension is a type of Defined Contribution scheme that you arrange yourself. It allows you to contribute to your own pension, or to someone else’s pension such as your spouse or child.
A personal pension is a great option to provide additional funds for employed workers alongside a workplace pension. However, a personal pension could be very valuable to a self-employed individual or unemployed person as it allows them to contribute to their future when a workplace pension isn’t viable.
How often should I review my pension?
Pensions are long-term investments, so it is not usually at the forefront of your mind, however, a yearly review is advisable.