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Will your pension provide feast or famine?

21 October 2013

The word ‘pension’ in itself conjures a whole host of scary images and petrifies people with large investment portfolios as well as people with mediocre retirement plans alike. According to the Oxford English Dictionary, the word Pension means Retirement Income, but more often than not, people think of ‘Pension’ as a State related benefit, such as ‘Old Age Pension or Disability Pension which creates the picture of severe depression & starvation for people that cannot look after themselves.
This might sound dramatic, but for the majority of people, discussing pensions & retirement planning is right at the bottom of the list this weekend, oh, and next weekend too. This is because people do not want to face reality and seriously look at their retirement provision because they find it scary or uncomfortable.

overwhelmed-paperwork-survey-fatigue-difficult-confusion1-1024x682There are a number of reasons for this, but in the main, it is because there have been numerous governments, making numerous pension legislation changes, which in turn has led to numerous Insurance Companies creating numerous different Retirement Contacts with numerous rules and that has lead to the main problem of utter confusion and misunderstanding! Unfairly, the opinion of the man on the street is that private pensions are rubbish!

Back in 2006, a whole new raft of pension rules were put in place in the UK which affected anyone with any kind of existing pension plan and anyone who was thinking about starting one.  It was launched to the world as Pensions Simplification Day though you could laugh, because in reality the new legislation just created more confusion to add to the ceiling high stack of pension confusions & misunderstandings.

Another serious problem was that people had taken out pension plans in the late seventies through to the nineties, without really understanding how they worked. Big numbers were promised on the back of unrealistic growth rates. People took out these plans, put the paperwork at the bottom of the drawer & didn’t look at them again until the year before they retired, by which time it was too late to do anything. All the extra money they could have earned was gone and that was that.

math-equation_chalkboardIn addition, there was widespread miss-selling throughout the late eighties by encouraging people to opt out of SERPS (State Earnings Related Pension Scheme) coupled with the ability to leave their employers scheme to which membership was previously compulsory. There was even a government advert plastered all over the UK, on train stations and on the Television informing the public of their freedom to break free from their employers pension scheme. Whilst everybody’s circumstances are different, I think it fair to say, that it would be very rare to benefit by leaving any pension scheme that was receiving money from an employer for the benefit of an employee, especially when you can make private contributions separately anyway. Yet, thousands of people opted out resulting in many millions of pounds paid by insurance companies in compensation. This was widely publicised at a time when huge pension theft was being reported due to the collapse of the flamboyant Robert Maxwell empire, whereby hundreds of millions was taken from the pension funds of his employees.

All of the above has made the last twenty five years nothing less than turbulent within the pensions industry. That said, how many people actually review their retirement planning regularly?  Over the past 3 decades I have met hundreds of people that just took out a policy, because someone suggested that it was a good idea, yet they have no idea how it works or what it’s going to provide them with.

Previously, many pensions followed a model that offered a smoothed return of a number of years. Whilst the intention is good, they are expensive to run and generally the performance has been poor. Additionally, these funds operate on a ‘one plan fits all’ basis, which is ridiculous, because every investor has a different personal attitude to risk and therefore should have an investment fund tailored to them.

Perhaps what saddens me most is that so many of them could now be significantly better off had they looked into their scheme and what it offered.

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It is now critical that people start taking responsibility for their retirement by making sure they understand what they have & what they are going to have when they finally put down their tools.

The good news is, that the pensions market has had a complete overhaul, and in my opinion now offers the opportunity to prepare for retirement using investment schemes that are clear to understand and offer a much fairer deal for clients. We have found that our pensions business has grown tenfold this year due to our simplified offering, whereby clients can couple their savings, investments & pensions into one easy to manage portfolio system. This also enables clients to consolidate any number of old pension plans together if it is in their interest to do so and will often save them money in policy charges, including pension or investment policies that no longer receive contributions.

In reality a modern pension offers good value for money, tax free growth and tax enhancements to any contributions you make. Also the old days of having to purchase an annuity with your pension fund have gone, enabling the choice of drawing down income from your pension in tranches which is much more flexible at a time when annuity rates are on the floor. Of course most providers won’t tell you this and will happily ask you to sign a form at retirement which will provide you with a mediocre income for life (but more for them).

Never, ever accept an annuity income from the provider of your pension fund until you have checked with a financial adviser that it’s the best option for you, because it is unlikely to be. Most pensions carry an open market option, which will often result in a higher pension being offered by a different provider. In addition, there are enhanced annuities for people that have poor health or lifestyles which could be deemed life shortening, so if you want a better retirement income, it pays to hit the booze, start smoking & drive fast cars, however, this is not recommended by me of course.

A destitute retirement is not the fault of a pension provider, financial adviser of fund manager. I urge you, to take an interest, get involved with your retirement planning and maybe even enjoy it.

Whether your pension will produce feast or famine is really down to you!

About the author: Grant Miles has worked in the financial services industry for over 25 years and has a wealth of experience across all aspects of Grant MilesFinancial Planning. Starting out with the home service company, Pearl Assurance in 1987, Grant moved on to Barclays Financial Management 10 years later. At Barclays, Grant was a Financial Adviser for Barclays Premier Clients and Barclays Corporate prior to starting his own business in 2002. Since then, Grant has built a large portfolio of clients in the UK as well as expats in Northern Cyprus.

Grant is registered with the FCA in the UK (previously FSA) and qualified in all aspects of financial planning and is quite possibly the highest qualified person on the island having completed his Level 4 diploma last year.

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