What does intelligent retirement planning mean to you?
Having the best pension plan in place, right?
But, suppose you’re going to retire in a few months. And you discover your best pension plan became unsuitable to your current situation, many years before. You will be in a big shock, right?
Of course, it’s your pension money, and you expect the best possible outcomes from it when you step into retirement. However, avoiding a regular pension review may result in poor returns from your pension that are not even close to your expectation. You will only get disappointment and loss.
Just finding a good pension plan doesn’t mean you have secured your retirement life. You should consider reviewing it routinely to ensure the highest returns for a financially secure retirement.
Like many other people, you might be overlooking reviewing your current pension. But, you won’t again, once you know its importance and benefits.
So, before you get a sock of your life, let’s help understand why a periodic pension review is important and how you can do it.
What is a Pension Review?
It is a process of examining your current pension scheme/s to determine if it is performing well and as per your expectations. The process may include reviewing your pension funds to know
- how much they have grown
- how they are invested
- how they can be compared to other similar pension plans
- and many other aspects
Why is the Pension Review Necessary?
Pension is one of the important wealth that you have earned by working hard throughout your life. You must take care of your pension by consistently reviewing it, just the way you do for your other sort of wealth. Following are a few more reasons that will help understand the need for reviewing your pension.
1. Risk Assessment and Management
The amount of risk you can bear with your pension pot may vary on different stages of life depending on your financial situation, and other factors. For instance, suppose your funds have been performing really well for years and your retirement time is still far away. In this case, you can afford taking more risks to attain your final financial goals. Conversely, if you have lost one of your income resources (a side business) in this case, you can’t afford more risk with your pension investments. Therefore, it is essential to review your pension regularly to keep track of all risks and manage your funds according to your attitude to risk.
With a regular pension review, you can ensure that the risks are still manageable, and there will be no financial crisis at the time of retirement.
2. Check on Charges
Another most important reason for reviewing your pension is to identify if there are any unnecessary or outdated charges. Pension plans are consistently developing, and taxes have greatly reduced over the past few decades. A review will ensure that you are making the most out of your pension pot, especially if you have an older plan that has typically higher management fees than today’s plans. You can identify, amend and remove any needless charges and ensure your funds are performing at their best level.
3. Know Pension Performance
Some funds may have been performing exceptionally well when you initially set up your pension pot. But, they may have become underperformers over time and impact the overall performance of your pension plan, particularly during downturns. A regular review allows you to identify and highlight such funds that are not performing quite up to the mark. And lets you improve overall pension performance and final returns.
4. New Investment Opportunities
If you have a pension plan that sticks to the same investment approach from day one, it may not have accumulated enough savings to support you during retirement. A regular pension can help identify if your original options are underperforming and if you should switch to other options or a different pension plan.
The pension investment options are far way more than they used to be. Thereby, you can choose a better option to grow your funds at a faster rate. You can again review your pension to check on the performance of new investments.
5. Ensure a Healthy and Secure Retirement
Unless you do a regular pension review, you will not have an idea of how much money you could expect from your pension pot after your retirement. A regular pension check will help you confirm that you are on track with your retirement goals and making a healthy progression towards retirement life. Having an idea of your current pension situation will let you adjust your plan to fit your post-retirement needs and expenses. This way, you can ensure a secure and healthy retirement life.
How Often You Should Review Your Pension
As pension is a long-term investment, it requires regular review and modifications to be on track with your goals and current market situation. Though there are no fixed rules on when or how often you should review your pension, it is advised to review your pension plan at least once a year. However, the review time will depend on your current circumstances, investment options, your retirement age, and other factors. If not possible yearly, you can consider reviewing your pension pot every two years or when your circumstances demand it.
Why Seek a Professional Pension Review Service?
It is always an intelligent act to seek expert assistance rather than doing things in the wrong way and wasting time. Well, you may think you have enough knowledge to review your pension on your own. But, you may don’t know what you don’t know, which can lead to blunders and thereby low performing pension funds.
As the finance market is quite vast and fluctuating, you may not be aware of new investment options, changes in finance charges, pension rules, etc. Thus, it is wise to hire a professional pension review service or a financial advisor.
Financial advisors have thorough and up-to-date knowledge of the financial market and pensions. When reviewing your pension, they will use their expertise and find out glitches that you can’t otherwise. They will also suggest the most accurate solution as per your financial situation and needs, to improve your pension returns.
When or after reviewing your pension pot, a financial advisor will suggest your best pension schemes, mortgages, and investments options, saving you a considerable amount over the long term. They will make sure your funds aren’t eroded so much by inflation and tax. Moreover, they will save from making costly mistakes, such as falling victim to fraud and investing in an inappropriate financial product.
What Type of Pension Can be Reviewed?
Mainly there are two types of pensions:
- Defined Benefit (DB) Pension
- Defined Contribution (DC) Pensions
Both of them can be reviewed to ensure you get maximum benefit through them.
Talking about the DC pension, both you and your employer contribute funds into a pension pot. And the pension amount you receive depends on the amount that has been paid in, tax relief, and performance of your investments. When it comes to reviewing and switching from one pension provider to another, DC pension proves to be the simplest and most convenient.
DC pension can be of different types, such as:
- Personal pension
- Self-invested personal pension (SIPP)
- Stakeholder pension
- Pension used to contract out of SERPS.
No matter which you have invested in, you can easily review and modify your pension as per your needs.
In a Defined Benefit pension transfer isn’t as easy as a DC pension. In this, you don’t have an individual pot for you; rather you need to invest in a scheme which will pay you returns. These types of pensions usually come from large private companies and public sector jobs. And the growth of your pension funds depends on how many years you’ve worked there and your salary. You can review a DB pension, but even if you wish to move your funds, you will require a cash equivalent transfer value.
Depending on your pension type, you should consider a proper review of funds with the help of a finance expert.
Importance of Reviewing Your Personal Pension
Personal pension falls into the category of a Defined Contribution scheme. It is a pension plan that you arranged on your own that provides you with additional funds alongside an employment pension.
A personal pension can be beneficial and valuable for an unemployed or self-employed person as it lets them contribute to their future when there is no workplace pension. Owing to this, it is absolutely essential to keep on top of the personal pension pot to ensure that the additional
investments are performing their best and offer great outcomes.
How Much Pension Review Costs?
Cost of pension review may vary depending on the adviser you have chosen, the pension plan, complexity of pension pot and other factors.
Most financial advisers offer an initial free consultation and later will cost you to continue the service. Their fees can be paid on transfer, not upfront. Many people prefer to pay them from their pension plan instead of paying directly. Usually, the fees are calculated as a percentage of the cash you wish to withdraw, transfer, or invest.
You may be thinking of a free pension review option, but remember that there is a purpose behind most of the freely available things. Many free pension review services are designed to entice you to transfer your pension funds into a high-risk scheme. Thus, you must be careful while availing any free review service or get it from a reliable provider only.
Even if you think pension review is an expensive process, it is absolutely worth it. Reason? It saves your money in different ways while ensuring you get the best retirement income and benefits.
Common Pension Mistakes To Avoid
If you wish to get the best outcomes with your pension pot, make sure to avoid big mistakes. While overlooking pension review is the biggest mistake, there many more that can affect your pension outcomes and retirement life. For instance, many people delay pension contributions, which means they do not start early pension planning. A delayed pension set up, and contribution can cost you a fortune. You may not find enough money to provide you with needed income in retirement, and you can’t help as your retirement time is quite close.
Investing in old pensions is another common mistake that can lead to financial issues during retirement. The charges for old pensions are way higher than modern pensions. Thus, if you leave money in old schemes, you will be in a great loss. You can either consider merging them into modern plans or choose other pension schemes.
One more mistake you should be aware of is falling for pension scams. Try to avoid cold-call that tries to persuade you with the offer of high-interest rates or high guaranteed returns. Pension freedoms have led to increased pension scams over the past few years.
In a Nutshell
Till now, you must have got enough understanding of the pension review concept. A regular pension review is a wise financial practise that everyone with a pension pot should consider.
Here is a quick review of reasons that make the pension review an indispensable choice for pensioners;
- To know if the current investment options suit your acceptance of risk levels.
- To identify if there are any additional management charges, taxes, and annual fees on your funds.
- To know if your investment options are performing well and if you are comfortable with it.
- To confirm if the pension savings are enough and suitable for your retirement needs.
- To decide if consolidating frozen or preserved pensions from last jobs into one large pot would be good or not.
- To identify underperforming investments that are restricting your financial goals.
On a Final Note!
Of course, setting up a pension pot, or reviewing it regularly is quite challenging, and a time-consuming task. However, it is of utmost importance in order to secure your retirement and leave a worry-free life. You can make this task easier and effective in different ways, such as using a pension calculator, online tools and consulting with an expert.