Hannah Foxley AKA Finance Girl. Chartered Financial Planner
Happy New Year ladies, I hope you had a great Christmas and the New Year has started well for you. In the first of my blogs for this year, I wanted to get you to think retirement planning and the reasons why your pension will not give you the retirement you want. Here are my top 7 reasons.
You are not paying into it
So you had the best intentions of paying into your pension every month, but when things got tight, you stopped. Sound familiar? Or maybe, you left employment to set up your own business and haven’t got round to setting anything up? If you have stopped making contributions and haven’t got around to re-starting, then now is the time to take action. Gaps in contributions will have a significant impact on your final pension fund, even a year will make a huge difference.
You haven’t changed the amount you are paying in since you started it
You started a pension ten years ago, paying £50 month into it and you are still paying £50 a month into it. As the cost of living increases, known as inflation, the real value of your money is falling all the time. If you don’t increase your contributions in line at least with the cost of living, you are eroding what your pension will buy in the future. Added to that, you are likely to be earning significantly more than an inflationary increase in earnings. As your earnings increase, so should you pension contributions. If you are running a business, you can payments to your pension fund direct from the company, thereby saving yourself corporation tax.
You haven’t reviewed the investments within it
When was the last time you reviewed what your pension is actually invested in and whether it suits your current needs and risk profile? You may be invested in funds that are significantly underperforming their peers, or those that are too expensive in relation to their peers, which again will have a big impact on performance. Having your money invested in the correct mix of investment types, known as asset allocation is the biggest factor in the performance of your pension. Get it wrong, or don’t keep it under review to make sure that it is right for you and it could have a devastating impact on your final pension value.
The investments don’t match your risk profile
Your risk profile will change over time depending on a variety of factors. Certain life events can make you more cautious but equally can mean that you feel more able to take risk and if you don’t have this reviewed on a regular basis you are likely to be in the wrong mix of investments. The younger you are, the greater the capacity that you are likely to have for risk, as the longer you have for your fund to recover any extreme volatility. Other than correct asset allocation, time is the greatest reducer of volatility. The nearer you are to retirement, the lower the capacity for risk and loss you will have as you won’t have either time or earning capacity to make up for any losses. It is therefore essential that you review the risk profile and asset allocation of your fund on a regular basis and particularly as you near retirement.
Paying too high charges in an old contract
Some of the older personal pension contracts have got very high charges and a myriad of hidden admin and policy fees, which can have a serious impact on your fund. I have even seen some that charge you for not paying in! It is well worth getting old policies reviewed to see if transferring to a newer contract would be more favourable in terms of charges. The older contracts tend to be very restrictive in terms of the funds offered, so there is a possibility that the funds that you are invested in are suitable for your current needs.
You haven’t kept track of your old occupational schemes
Many people change jobs and completely forget about the pension rights that they built up while at their old employer. Those pension rights belong to you and you must not forget about them. You do not lose the rights to these pensions because you have left your employer. You do not have to leave them with your old employer and can transfer them to a personal pension, which is easier to keep track of and could be useful if you have several ex employer pension pots. The suitability of doing this will of course depend on the individual circumstances. Old final salary schemes are likely to be worth their weight in gold though and should not be lost track of. If you have changed address since leaving old employers, make sure you let them know your new one so that the pension trustees can keep you updated.
You haven’t been realistic about when you can retire
If you haven’t started paying into a pension until you are 35, it is unlikely that you are going to be able to retire at 55 unless you have been able to make huge contributions each year and by huge I mean at least £40,000 per year! Either that or you have created a business that you can sell for a lot of money. The earlier you start saving, the more chance you have of retiring early, but if you leave it too late, unless you have significant other assets, you just won’t have a big enough fund.
You haven’t been realistic about how much you need to pay in
I have been told many a time that pensions are rubbish because you get nothing back out of them. The answer to that is that if you didn’t pay enough in, you won’t be getting very much out. Unfortunately paying £50 a month into a pension for your whole working career is not going to afford you a luxury retirement. To give you a realistic idea of how much of a fund you need in the current economic climate, a £500,000 fund for a woman of 65 would give you tax free cash of £125,000 and buy you an income of £21,795 if you bought a fixed income known as an annuity. The annuity rate for a 65 year old woman is 5.812% as at January 2013. Add that to your basic state pension of £107.45 a week, which amounts to another £5,587 per year and you have an annual income of £27,382. As you can see, you need a very large fund to buy you a really decent income in retirement. The secret to good retirement planning is a mixture of different assets and income streams and a good financial planner is key.
As a retirement specialist, I can help you through the minefield of pensions and retirement planning, leaving you feeling confident and secure.
For down to earth, expert advice contact me at [email protected]
The Women’s Wealth Expert is a trading style of Foxley Financial Consulting Ltd, which is an appointed representative of Sense Network Ltd, which is authorised and regulated by the Financial Services Authority. Registered in England and Wales company registration number 8179943. FSA number 587675.