Is Your Pension Working Hard Enough For You?
Your pension is your financial lifeline designed to get you through your retirement years. If you are similar to most people, you are hoping your pension fund will perform well enough to provide you the type of lifestyle you're accustomed to living today. In a best-case scenario, your lifestyle would even improve in retirement. However, this requires a pension that works as hard as possible while you are saving. And that's the question. Is your pension working hard enough for you?
The unfortunate truth is that a good portion of today’s pensions is not performing as well as they could. Making matters worse are recent changes to pension law that only work to the benefit of savers if they know what those changes are and how to adjust their pensions accordingly. We recommend that any pension savers who have not conducted a recent pension performance assessment do so right away.
Why Pensions Underperform
An industry survey referenced in the 2013 report by The Independent revealed 113 UK pension funds considered serial underperformers. Combined, these funds managed some £31 billion in assets. The sad part is that so many people do not understand their pensions are underperforming because they do not know what fund managers are doing.
There are four primary reasons why pensions underperform:
- Changes in Circumstances – As a saver's circumstances change, pension investing needs to change with them. For example, an individual may switch jobs two or three times in his or her lifetime. It may be more profitable to transfer company pensions from previous jobs into the current pension in order to provide a larger amount of money to put into the best-performing investments.
- Investment Volatility – No investment performs excellently all the time. The investment that was performing well five years ago may not be doing so well today, and vice-versa. Without regularly reviewing how a pension is performing, investors may not know how well their current choices are doing.
- Closed Funds – The pending rule changes for pensions have led many companies to close old plans in favour of establishing new, less costly ones. Doing so automatically removes the incentive to make sure old funds are performing up to par. Leaving your money in an old plan could mean you suffer financially.
- Administrator Performance – In a perfect world, pension administrators would always work hard to ensure their clients are getting the most for the money. Nevertheless, this is not a perfect world. There are pension administrators who are just not doing a good job. It is up to investors to keep tabs on them.
Options Available to You
An underperforming pension is not something to panic about in the short term. As long as you know your options and you are willing to make the tough decisions, you can improve your financial situation. Here is a list of options to help you rescue a pension pot that is not doing as well as it should:
- Lump Sum Withdrawal – The last option is to take a lump sum withdrawal and use the money to invest in other opportunities. Again, there are tax implications we will address in just a moment.
When all is said and done, the two primary options are transferring and reinvestment. Transferring from one pension scheme to the next brings with it a legal requirement to make sure the new pension scheme is legitimate and government approved. Transfers can be conducted prior to age 55 without penalty as long as all of the money goes from one scheme to the next. If any money is withdrawn as cash, the individual will pay a penalty of up to 55% of the value of the withdrawal. The same penalty applies if pension funds are invested in non-qualifying investment opportunities, such as overseas property.
This is important to remember in light of the fact that there are some companies offering pension liberation schemes promising lump sum payments prior to age 55. The vast majority of these schemes are not legitimate. With very few exceptions, it is not possible to access pension funds prior to age 55 without incurring significant penalties.
Where reinvestment is concerned, you can begin accessing a pension pot at age 55 with no penalties. Whether you gradually drawdown or take a lump sum payment, the first 25% is tax-free. The remaining 75% is taxed at your marginal rate. This provides savers with an excellent opportunity to get their money out of a poorly performing pension scheme and put it into something they believe is more profitable.
The one thing to consider with the reinvestment option is the tax implications of other investments. For example, putting your money into property may generate a higher return, but you will also be paying capital gains on those returns. It may be a small price to pay if your return is high enough.
Alternatives to Pension Fund Investment
The sheer number of investment choices now available to pension savers makes the idea of withdrawal and reinvestment very attractive. If your situation and circumstances warrant, you could do far better financially by taking advantage of one or more of the alternatives to pension fund investment.
One of the more popular options right now is to invest in commercial property through a SIPP. Thanks to changes in the law, you can now hold commercial property in a SIPP by investing in a property fund or transferring ownership of your commercial property to a fund you will then invest in. Over the last 10 years, commercial property has averaged an annual rate of return of 6.3%. In the last five years, the rate of return has been closer to 8%.
Investors who prefer a more hands-on approach could use pension funds to purchase buy-to-let property. The nice thing about this sort of property investing is that it gives individuals direct control over their assets. You also do not have to be a millionaire to be a landlord. If you have enough in your pension pot to make a 25% down payment, you can finance the rest with a buy-to-let mortgage. Rental property also averages better than 6% per year.
High interest savings accounts are yet another option, although not many people take advantage of them. The interest rates on savings are not attractive enough right now to make that much of a difference. For example, even a five-year bond at 3% only does half as well as commercial or residential property. You may choose savings as part of a larger strategy, but it should be a supplement to other, better performing investments.
Of course, the returns you get on any sort of investment can never be guaranteed. Whenever you pull money from an existing pension pot, whether you do it through a pension drawdown or a lump sum payment, you are taking a risk by investing it elsewhere. Also, keep in mind the risk/reward principle.
This principle states that the greatest financial rewards are achieved by taking the greatest risks. Those who are averse to risk may choose to put their money into a relatively stable savings account or bond. Others might choose to leave their money in their current pension schemes. Investors not afraid of risk may choose the option of cashing in pensions to invest in property, equities, etc.
Why You Need Professional Advice
We have given you a lot of important information about pensions and whether yours is working hard enough for you. If this seems a bit confusing or overwhelming, do not be alarmed. The laws and principles of investing in pensions are complex. Only those specifically trained in the principles of pension investing really have a handle on all of it. This is why you need professional advice before making any changes to your current situation.
Should you take advantage of pension transfers or combine multiple pension pots into a single fund? Should you consider cashing in your pensions or drawing them down for investment elsewhere? The decisions you need to make depend on your circumstances, goals, and aversion to risk. These are decisions you should not try to make on your own.
We invite you to contact us for a free one to one consultation with our panel of FCA pension experts. Each of our experts can provide you with the professional advice you need to make wise pension decisions. Your consultation will be free of charge and you will be fully apprised of all fees associated with any services or products you choose to purchase, before you agreed to accept them.
If your pension is not working as hard as you would like it to, now is the time to do something about it. The sooner you take action, the sooner your pension will be performing up to your standards. And that is good for your financial future.
Our panel of FCA Approved Pension Experts Will Help You:
- Free Initial Assessment of Your Current Pension Funds
- Find Out Your Projected Retirement Income
- Understand The Most Appropriate Alternative Investments
- Find Out How The Latest Pension Changes Affect You
- Release Cash From Your Pension
- Discover The Benefits of Changing Pension Providers