It pays to be 'pension savvy' when planning your retirement
ARE you ‘pension savvy' about planning your retirement?
A major new report has indicated that in general, pension savers are mostly ‘saving blind' into their pensions, with no idea how much they will get out when they retire.
The report, commissioned by the Association of British Insurers (ABI), confirmed that just 3 per cent of people know what their personal contribution to their pension is, in monetary terms. The vast majority also have little knowledge of employer contributions and the tax benefits of their pension.
One key conclusion in the report ‘Reframing Pension Savings' is that many are in need of financial advice to understand that, if they are not saving into a workplace pension, they are missing out on both employer contributions and on tax relief. Understanding this, says the ABI, is essential, as it is a compelling motivator for joining or staying in a pension scheme.
A number of developments over the past decade have transformed the level and nature of pension provision throughout the UK.
First we have seen the gradual roll-out of auto-enrolment, whereby all eligible workers are entered into a workplace pension scheme. This has resulted in 80% of those in their 20s now saving for their retirement.
Despite this, separate research by Scottish Widows tells us that most people across the UK, men and women, are still not putting away enough.
In fact, here in Northern Ireland we are bottom of the table in the UK for pension saving – less than half of us (46 per cent) are making adequate provision for our later years.
The second event that has transformed the pensions landscape is the introduction in 2015 of new freedoms in the way we can access our pension. These allow anyone over the age of 55 to draw money down from their pension as a lump sum, with the first 25 per cent tax-free and the rest taxable.
With these freedoms comes increased complexity, particularly with regard to tax. The head of retirement policy at the ABI, Rob Yuille, summed it up thus: “Pension freedoms put more power into the hands of consumers, but this flexibility also increased the complexity and risks that consumers face. Our recommendations are for interventions that will transform the way people interact with their pension pots and help people navigate their choices.” In other words, again: take advice.
Well, the Financial Conduct Authority found that before these new choices were introduced in April 2015, only 5 per cent of major pension decisions were taken without advice. However, this quickly rose to 30 per cent as the new freedoms were embraced. That's nearly a third of major pension decisions taken without advice, in a more complex and risky pensions landscape.
The ABI tells us that in general, half of us (50 per cent) find pensions confusing, 22 per cent are unaware how much they are paying into their pension, and only one in four of us understands the benefits of tax relief in pension saving.
The conclusions, they say, are that people must be encouraged to take advice, must receive information and communication to educate them throughout their financial life, and, as we discussed last week, should be encouraged to have a general mid-life ‘financial MOT' to check on all aspects of their financial needs.
In conclusion, the ABI said that their report was done because ‘more than half of fully withdrawn pension pots are not spent, but moved into other savings and investments which result in people paying too much tax, and missing out on compound investment growth.'
Again, the conclusion was clear: if you are going to draw money from your pension, it is now more essential than ever to get ‘pension savvy' – by talking to a financial adviser, and taking financial advice.
:: Michael Kennedy is an independent financial adviser and pensions specialist, and can be contacted on 028 71886005 . Further information is available on the Facebook page “Kennedy Independent Financial Advice Ltd”