Pension Advice

modelreject

Hi,

I am new to pensions and know very little so I need quite a bit of help. Here is the lowdown. I have two pensions from previous jobs. I was a bit younger when they were started by the companies I worked for and I had little thought for them and how they work. At retirement age they should come to a total value of £4000. This has got me thinking that I need to get myself putting money into another scheme for when I retire. I am 32.

What is the best secure scheme? How do pensions work? Do I get a lump sum when I retire? Do I buy an annuity? Is my money safe in a pension eg is it covered by governments? I know there are a lot of questions to be answered and any help would be appreciated.

Many thanks,
C


I suppose a good question is how much would an average person need to live comfortably each year?

Cautious_Investor_3

Hi

Let’s deal with each of your questions in turn:

1. The starting point is to find out whether your employer offers a pension scheme and if they do whether or not they will contribute. If the answer to both of these questions are “yes” it is almost certain that you will be best to join the scheme, after all you get free money from your employer! If there is no scheme available you will have to make your own provision. A Personal Pension or Stakeholder will give tax relief on contributions, you could use an ISA too to promote flexibility, however the important thing is you start to save an as you get tax relief on pension contributions this may be a better route.
2. How do pensions work? That is a massive question and probably best answered with reference to the Money Made Clear website (Google it), its a website offered by the FSA and will provide you with excellent information on what’s available.
3. You can have a lump sum when you retire, in most cases it is currently it is limited to 25% of the amount you have built up. Remember if you take the lump sum you will get a lower income from the pension, although as the pension income is potentially subject to income tax many people take the lump sum and invest it in say ISAs to produce a tax free income
4. At some point you will need to create an income from your pension (that’s generally the whole point!). One way of doing this is via an Annuity. Whilst these are not right for everyone they are still popular and suit many people. The rules around how you get an income from your pension have changed significantly over recent years and will do before you retire, I therefore wouldn’t concern yourself too much at the moment, spend your time thinking about how you will build up a fund in the first place
5. Two questions here. If your pension provider goes bust there are schemes that will provide you protection. However the next question is how much risk you are prepared to take with the actual fund itself, here there are no guarantees, the value can fall as well as rise, and you need to think about how much risk you want to take.
6. How much income do you need? Well, that is entirely down to you, it will depend on factors such as your earnings during your working life, your lifestyle, financial commitments such as children and mortgages etc. Only you can answer that question.

Lastly, do your own research, consider taking advice from a good quality IFA (find one at Unbiased.co.uk), and save as much as you can.

Good luck, I hope this helps!

The Cautious Investor

modelreject

Thanks for the reply and take the time to write it. I will definitely research more.

My employer doesn't supply a pension scheme, but this is being made compulsory in 2012?

Are all pensions a risk. Are there any where there is no chance of losing money?

Many thanks again,
C

dunstonh

Are all pensions a risk.

Pensions actually carry little risk. Money purchase schemes are effectively just a container for your investments and its the investments that carry the risk. Defined benefit schemes are dependent on having the assets to pay the liabilities but there is protection in place to cover the bulk of the money if the scheme fails.

Are there any where there is no chance of losing money?

Yes if you use cash but then you are replacing investment risk with shortfall risk and inflation risk. Over the long term, they could actually be greater risks than a sensible level of investment risk.

Loughton_Monkey

Yes, Cautious Investor has given excellent advice above.

Looks like you need to buy a pension on your own (rather than join an employer one). But pick a good company - one that has been around for a while. Prudential, Aegon, Scottish Widows are just some of the names I would trust [I personally use SW].

You sound quite cautious about the fund being risk free. This is not strictly possible. If any of the companies I mention went bust, then we would all be in big trouble. But as has been said, the risk is probably more to do with the fund(s) you actually choose to invest in rather than the Pension Provider solely.

At the age of 32, the perceived wisdom would be that you can afford to go for some of the more 'adventurous' funds. But that's up to you. For example, although much older than you, I split my contributions between 4 funds. Two are quite conservative and tend to hold their value/increase slightly. The other two are in pure managed finds - one for Asia and one for Worldwide. These are far more volatile and can go up (or down) as much as 5% in value every month. Long term, though, they should grow very well.

Keeping a track on the values regularly will give you more confidence, and hopefully you will develop a sound knowledge of how these things work and ultimatley how much you need to put in to have a good retirement.

modelreject

This may sound silly, but who do I approach to get a pension. As I said, I'm not very savvy, and I definitely can't afford a Financial Advisor. Any help welcome.

Thanks for all the help.

dunstonh

modelreject wrote: »

This may sound silly, but who do I approach to get a pension. As I said, I'm not very savvy, and I definitely can't afford a Financial Advisor. Any help welcome.

Thanks for all the help.

An independent financial adviser is your best bet. You dont need to worry about cost too much as the fee can be collected via the pension either in commission form or agreed fee form. Actually with pensions its best doing it that way as you are effectively getting tax relief on the fee.

modelreject

Regarding commission. Can you only pay if the pension increases and if the worst happened and I lost money I would still have to pay the FA.

Loughton_Monkey

modelreject wrote: »

Regarding commission. Can you only pay if the pension increases and if the worst happened and I lost money I would still have to pay the FA.

This is what I call 'life'. Clearly by the time the 'worst has happened', your IFA has been paid and spent the lot! If he got paid on results, then I don't think he'd be an IFA. He'd live off his own excellent investments.

Always remember, shares can go down as well as belly-up.

yelf

modelreject wrote: »

Regarding commission. Can you only pay if the pension increases and if the worst happened and I lost money I would still have to pay the FA.

you pay for advice based on all known info at the present time. if the ifa only got paid on fund increases the industry wouldnt exist

dunstonh

Regarding commission. Can you only pay if the pension increases and if the worst happened and I lost money I would still have to pay the FA.

Investments will always zig zag in value. That is the nature of investing. You are not looking short term. You are looking at very very long term. You are 32. Chances are you will see at least another 3-5 recessions. About another 5-7 major stockmarket crashes and various financial crisis (there have been 8 since 1956). You dont know when they will happen or what will happen but you know full well they will happen. They are not bad news either. The events of the last few years have been very good news for regular contribution pension payers.

Whilst many IFAs will accept remuneration based on fund value, someone just starting out doesnt have the funds available to justify that type of remuneration. Typically, you find servicing of portfolios tends to kick in around £50k-£100k plus.