Tilney’s six-point action plan to sort out your pension plans

Tilney is launching its second annual Pension Week campaign this week, with the aim of helping people get motivated to review their plans. Below, Tilney’s head of retirement planning, Andy James, gives a six-step checklist of things people should be exploring to help ensure their pensions on track to support them in retirement.

1. Are you saving enough?

“Research* shows that less than half of UK adults (48%) believe they are saving enough to fund the retirement they want. However, it can be difficult, without professional help, to quantify what ‘enough’ will be, potentially many years ahead. You should ask yourself three important questions:

• When do I want to retire?
• How long might I live in retirement?
• How much income will I need when I retire?
  
  

“We have found that, while people may have an idea of when they think they might retire, they can vastly underestimate how long their retirement will be and therefore end up with an insufficient pension pot. For example, if someone plans to retire at 65 and assumes they will live until 80, they can plan their finances accordingly. However, if they want to live on £30k a year in retirement, living another 10 years to 90 and assuming a 2.5% rate of annual inflation will increase their funding requirements by £336,000 at a time when it will be extremely difficult to make up the shortfall.”

2. Track down your missing pensions

“Nearly one in five UK adults admit to having lost track of at least one pension pot and according to the Department of Work and Pensions around £400 million is sat in “lost” pensions. This is a problem exacerbated by changes in the employment market with few people now sticking to one job for life, meaning most of us end up with multiple pension plans. The main reasons cited are lack of interest, lost paperwork and forgetting to notify providers of address changes.

“It’s really important to hunt missing pensions down as these are potentially valuable assets that can help make the difference between a financially secure or stretched retirement. Leaving these in the wilderness for a long time before tracking them down could mean you end up unwittingly enduring poor performance, high fees or an investment approach that no longer suits your needs. The earlier you find these and get them into shape, the better.

“The Department of Work and Pensions has given the go-ahead for “pension dashboards”, which will enable people to see basic information all their pension providers in a single place. This is a great initiative but these will take some years to develop, so for now it is a case of digging out paperwork, contacting former employers and using the DWP’s free Pensions Tracing Service.”

3. Consolidate your pension plans

“One solution to sorting out a mess of multiple pans could be to consolidate these into a single plan. This allows for simpler administration and oversight. The pension could then be taken from job to job, providing an employer agrees to pay into the scheme instead of their own. Most individuals have never consolidated their plans.

“Consolidating scattered pensions with a single plan – such a Self-Invested Personal Pension (SIPP) – can certainly help improve control, providing the new plan offers a wide and flexible choice of investment options. But before transferring a pension it is vital to ensure no hefty penalties will be incurred or valuable benefits are lost, so it is really important to take professional financial advice.”

4. Check your nominated beneficiaries are up to date

“Modern defined contribution pensions can be inherited, very tax efficiently. The mistake we commonly find is that people expect their Will to dictate where and how they want their assets distributed after their death. This is true for most things, but not for pensions. When you set up a pension scheme, you can nominate a beneficiary in the event of your death, and this will override anything that is in your Will. This can cause a problem if your circumstances have changed – for example, if you have gone through a divorce but forgotten to update this, or named parents on pensions taken out before you were married. It may be that you have multiple plans with various different beneficiaries attached to them. You are able to easily find out and change a beneficiary directly through your pension provider.”

5. Review the investments held inside your pensions

“A pension is really just a tax-efficient wrapper designed to support retirement savings and inside every pension there will be an investment. Existing plans therefore need to be regularly reviewed to make sure both the investment approach is suitable and the returns being delivered are up to scratch as the differences in performance can vary hugely. Research we undertook last year revealed that 55% of people with pension plans did not know where their pension is invested and 38% admitted to not even knowing know which company is managing their current plan. The lack of engagement with pension investing is highlighted by the fact that 84% of auto-enrolled pension savers are in the default fund which may not be the right investment for them.”

6. Maximise allowances

“Pensions are currently incredibly attractive from a tax perspective, especially for those subject to the higher rates of income tax. This is because savers receive tax relief on their pension contributions at their marginal income tax band. For a 40% income tax payer, this means a £10,000 pension contribution can be achieved at net cost of just £6,000.

“But these tax reliefs should not be taken for granted and could be targeted by a future Government seeking extra tax revenues from higher earners, so those able to benefit from them should make use of them while they can.”

“For most people, the annual gross pension allowance is up to £40,000. However, once this is maximised any unused pension allowances from the previous three years can be utilised, starting with the earliest year, through a mechanism called Carry Forward. This is well worth considering for those looking to bolster their fund and wanting to reduce an income tax liability this year.”

James concluded: “Engaging with and reviewing your pension plans regularly may not sound like a lot of fun but it is really vital. You need to ensure the plans are able to cope with the improved flexibilities introduced in recent years, including the ability to pass these on after death. Many old schemes are not able to cope with these new and appealing features and really do need to be reviewed at the earliest opportunity.

“The Department of Work & Pensions is working with the pensions industry, regulators and technology firms with a view to launching the Pensions Dashboard, which is currently in the design phase. The aim of this is to provide a consolidated view of all pensions owned by a saver alongside the State pension.

“The need for this dashboard shows that perhaps the majority of individuals in the UK are not really sure about what pensions they have and how much is in them. The Government is also looking to set up a mid-life review for all pension savers. Engaging with your retirement plans many years before your retirement makes sense. If you fail to plan then plan to fail!”

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* The research was conducted by Opinium for Tilney via an online survey in April 2018. It looked at the attitudes of 1,293 nationally representative UK adults (aged 18+) who had at least one workplace pension.