Nearly 1 in 3 individuals aged between 41 and 56 risk reaching retirement with inadequate incomes.

Pension planning

Do you have a pension plan?

For many people, pensions are mysterious and intimidating - leading many people to put off planning for retirement. It does not need to be this way.

The purpose of this guide is to give you a fundamental understanding of how pensions work, and how you can use them for retirement.

You will also find text links to research and blogs that will provide further reading and lots of hints, tips and ideas.

We will continually be updating the main page, so it's definitely worthwhile bookmarking it for future reference.

What is pension planning?

Taking savings to a new level

A pension is a special type of fund - or scheme - which is set aside for your retirement (a time when you withdraw from paid work and focus on enjoying life).

It is different from a savings account in that it cannot be accessed until you are older, and will typically be invested in different assets - such as company shares - rather than held in cash.

When you eventually decide to retire, you turn to start accessing your pension(s) to provide an income to support your lifestyle - rather than relying on a salary.

Pension planning, therefore, involves choosing one, or more, pension plans to build up over time in a way that allows you to achieve your retirement goals. This process involves a range of activities such as choosing an appropriate investment strategy, minimising costs (such as fees and taxes), monitoring long-term performance and making adjustments to the balance of your pension investments if they veer off-track.


Why save into a pension?

Your bank account is not the only choice when it comes to saving for retirement - nor is it the best one. A pension offers many advantages to help you meet your goals.

The most immediate benefit of saving into a pension is that it gives you access to tax relief, letting you grow your retirement savings faster.

Consider what happens normally when you save a bit of money. First you get paid and then you put the money into a savings account. However, before you even received your salary, it likely was taxed; for instance, at the basic rate (20%) or the higher rate (40%) (NB, tax rates in Scotland will differ). This lowers how much you were able to set aside for the future.

With a pension, however, the money you put into it can come straight out of your salary - before it is taxed. This tax relief, therefore, means that the money you otherwise would have paid to the government goes into your pension. For a basic rate taxpayer, therefore, this effectively equals a 25% “boost” to your retirement savings. For someone on the higher rate, it would be 66.66% (although note that the Lifetime Allowance, or LTA, will apply to all contributions).

To put this into perspective, a 25-67% boost to your pension savings (or contributions) stacks very well against the <1% interest typically offered by most bank accounts. It even surpasses most of the returns you can reasonably expect on the stock market - and carries no risk (although once received it will carry the same risk as the rest of the underlying fund/portfolio in which your pension fund is invested).

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Where do you start?

Figure out how much you need for retirement, and how much you have.

These are the two key pillars to crafting an effective pension plan. Your expenses do not go away in retirement, so you need an income to support your lifestyle - without a salary.

The government offers some financial support in the form of the state pension (which we will cover shortly). However, most people will require additional retirement savings of their own to cover their costs over the course of many years, even decades.

Establishing how much you have (your assets) is not always as easy as it might sound, and enlisting the help of a financial adviser can help you ensure you leave no stone unturned. Examples of assets that may be relevant to your retirement plan include your pension(s), cash savings, property and other investments (such as shares held inside an ISA).

However, you will also need to factor in your liabilities too - those things which cost you money. These might include your mortgage, personal debts, unpaid credit cards, loans with high interest rates and car finance deals. To reduce your outgoings in retirement and reduce the amount you need to save before then, your pension plan may involve finding ways to prioritise repayment of most of these.

Finding out how much you need for retirement is even more challenging. Everyone’s lifestyle is different, so your required amount may be higher/lower than someone else’s. Other factors can complicate the picture, too. Inflation, for instance, erodes the spending power of your money over time - meaning that £1 today will buy fewer goods and services in 10, 20 or 30+ years. Again, a financial adviser can use their knowledge, experience and dedicated software to find a reasonable “retirement number” for you to aim at.

Getting a strong state pension

In the 2021-22 tax year, the full new state pension amounts to £9,339.20 per year. According to one report, the state pension comprises £6 out of every £10 received by over-65s in retirement.

To get the maximum state pension you need to have at least 35 years of qualifying national insurance (NI) contributions on your record. (You also need a minimum of 10 years to be entitled to anything at all). Therefore, it is a good idea to check your NI record to see what you have so far accrued, and identify any “incomplete years” which may be worth topping up with voluntary NI contributions. This may not be necessary, however, if you are planning to keep working for the foreseeable future and are likely to build up a complete 35-year record over that time.

This is hardly surprising given that, according to Which?, an individual looking to live comfortably in retirement will likely need at least £19,000 per year to cover their costs (£26,000 for couples). The state pension has the potential to go a long way to help meet these outgoings.

For couples looking to retire together, the state pension can be even more attractive since each person is entitled to their own state pension - potentially doubling the combined income (£18,678.40 - i.e. £9,9.339.20 x2).

Your state pension is also “triple-locked” under the current rules in 2021-22. This means that the income increases with the growth of prices, earnings or by 2.5% - whichever is greater. Simply put, this helps ensure that your state pension income retains its spending power even if the cost of living increases.

Bear in mind that the time from which you can access your state pension (your state pension age) is different from the age when you can begin accessing any pots you have built up yourself, or with employers. As of April 2021, the state pension age is 66 for both men and women and is set to increase from 2026 reaching age 67 by April 2028. You can start accessing most pension pots from age 55, although this is expected to rise to age 57 in the future. You can see a forecast of what your state pension is likely to be by visiting the Government’s website here.


Track down pots and take stock

Make sure you don’t leave any savings behind when entering retirement.

It is quite usual nowadays for many people to work over a dozen different jobs across a working life. With each past employer, you may have built up a pension pot. It is common for these to be forgotten about, but there are ways to check.

The Pension Tracing Service has a database of over 200,000 workplace and personal pension schemes. This can be a good option if your past employer no longer exists or you are struggling to contact them.

You may need to take slightly different approaches for workplace and personal pensions. For the former, you can try to directly contact the pension provider that your employer signed you up to. You can ask your employer if you do not know their details.

For personal pensions (i.e. pensions you may have opened yourself), you will need to contact the administrators of the scheme to ask them about the value of the pot(s) and other questions.

It may be difficult to track down certain pension pots, particularly if you have forgotten the details of a personal pension or if you worked overseas. However, a financial adviser will be able to give you the best chance of finding these.

6.4 million people aged between 22-65 may have misplaced some retirement savings

17% of those with multiple pensions have lost track of one or more of their pensions

The number of estimated dormant and lost pensions by 2050 totals 50 million

"It’s important to get financial advice before moving your pension schemes, unless you’re confident that you understand the costs, benefits and risks involved."

Consider consolidation

Find out if merging your pension pots together could work better for you.

If you have, say, 5 or more pension pots from different past jobs then it can be very difficult to manage them in retirement. Consolidating them - bringing most/all of them - into a single pot can make it easier to keep an eye on your funds. It can often also save money on investment fees and give you access to a better range of funds which may improve performance. (As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.)

It is not possible to consolidate your pension pots with your state pension, which is funded from UK government taxation. However, you may be able to transfer a final salary pension to consolidate with a defined contribution pension. This is quite a complex process, and you are legally required to seek financial advice if the value of your final salary pension is over £30,000. Bear in mind that transferring a final salary pension is unlikely to be in your best interests, due to the attractive secure guaranteed benefits it offers.

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Craft a pension investment strategy

Choose your investment risk tolerance level and a suitable mix of assets.

With a final salary pension or a state pension you do not need to worry about investing. Your employer or the government provides your income for you. With a defined contribution pension, however, it is crucial to decide what you will invest in to achieve your retirement goals.

Here, you will need to factor in your investment horizon - how long you have to invest - and how much risk you are willing to take. If you want higher returns and are more comfortable with the value of your investments fluctuating, then the stock market (equities) may comprise most of your portfolio. If you are prepared to receive lower returns in exchange for less risk - or volatility - then other options, such as fixed-income assets (bonds), may be more suitable, although as stated above no form of investment is guaranteed and all can fall in value.

Whatever the case, it will be important to spread your money across a range of investments - i.e. diversify - to mitigate your risk and take advantage of more opportunities.

Prepare a tax plan

Don’t let your pension get needlessly eroded by the taxman.

Saving into a pension can be very tax-efficient due to the tax relief involved. Yet you still need to be careful not to fall into any common “tax traps” due to poor planning.

Remember, when you retire your pension income is still subject to income tax. Setting aside the annual personal allowance, a basic rate taxpayer will pay 20% on their pension income whilst the higher rate is 40% (note that rates differ in Scotland, as mentioned previously). To mitigate this, you might consider other retirement income options alongside your pensions - such as ISAs and your annual allowances (e.g. for dividends).

You will also need to be mindful of the “annual allowance” and “lifetime allowance” rules when saving into a pension. The former limits your tax-relieved annual pension contributions to £40,000 per year (or up to 100% of your earnings - whichever is lower), whilst the latter caps the total value of your pension savings at £1,073,100 before a tax charge would apply. Also, be careful with the Money Purchase Annual Allowance (MPAA) which can be triggered inadvertently and reduces your annual allowance to £4,000.

Integrate with your estate plan

Leaving a meaningful legacy to your loved ones

At the back of your mind, you may be wondering how you could also pass on your pension to your loved ones in the distant future - as an inheritance. By ensuring your pension plan fits into your estate plan, this may be possible.

It’s worth noting that your state pension cannot be inherited by children - although there are a few caveats for surviving spouses. This is also usually the case with final salary pensions (although these can pay a pension to a dependant, but they will not usually have the option to convert this into a lump sum). Yet you can pass down your defined contribution pension pot(s) to your loved ones, free from inheritance tax. If you die before the age of 75, your Lifetime Allowance will determine how much tax there is to pay on your pension pot. After this age, your beneficiaries may need to pay income tax on any benefits drawn from the pension they inherit. We recommend taking financial advice, if this is a concern or area you need to seek help with.

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Professional pension planning

Our experience and guidance can help you identify the best options to engineer what your retirement can become. 

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How a financial adviser can help

The value of professional insight and guidance

As you can see, a lot of thought needs to go into pension planning. Whilst there is much you can do yourself - such as tracking down old, forgotten-about pensions - it is likely that professional advice will help you make decisions based on the best available information.

If you are looking to review the fundamentals and performance of funds within your pension pot(s), a financial adviser can help you do this and present a clear picture of what alternatives on the market can offer.

Finally, one of the most important aspects of your pension plan is keeping your investment strategy on track. Over time, it is likely that the balance of investments in your portfolio will tilt, possibly putting everything out of line with your risk tolerance. A financial adviser can give you the insight and tools you need to monitor the portfolio and adjust where and when necessary.

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Do you have questions about your pension investments? Contact us to find out about the options available to you.