Most people have accumulated several pensions, and making the right choices about when and how to use them can be overwhelming.
Everybody deserves to have the best retirement possible, and while each person’s pension savings and goals will be different, planning for the future begins with understanding what you have saved and whether you’re getting the best from it.
This can be complicated when you have accumulated a number of different pension pots. The average person will work for 11 employers during their working life and a quarter of people will have 14 or more employers, according to the Department for Work & Pensions1. This can mean people reach middle age with their retirement savings scattered across half a dozen pension pots, including workplace schemes, any private pensions and your state entitlement.
It’s not unusual to ‘lose track’ of a pension and there is an estimated £400 million languishing in dormant accounts2, often because people have lost the paperwork, forgotten the name of their provider or can’t remember if they even had a pension with a former employer. If you need to track down missing pensions, there is a free Pensions Tracing Service (0800 731 0193), which can help reunite people with their investments.
What are the different types of pension?
There are various different types of pension, but most workplace pensions fall into the categories of Defined Contribution (DC) or Defined Benefit (DB). It’s wise to take time to understand the differences between these and how they work, as the type you have will affect the options available to you at retirement.
Defined Benefit pensions
Defined Benefit pensions, sometimes called ‘final-salary’ schemes, are run through an employer and pay out a guaranteed income every year in retirement, often a sum that rises with inflation. You can usually take a tax-free cash lump sum, too.
The benefits you receive are based on your earnings and the number of years you have been in the scheme. The rules of the scheme dictate the age at which you can take benefits – it is usually 60 or 65.
Because you can’t vary the income you take from a DB pension, it may not have as much flexibility as you would like. However, the benefits of such a scheme – such as a guaranteed income for life – mean they are usually always worth keeping.
DB schemes are expensive for employers to run so they are far less common than they used to be, with the majority of employers now offering DC pensions instead.
Defined Contribution pensions
With Defined Contribution pensions, individuals build up a pot of money and can choose from a range of options once they reach the age of eligibility (currently 55).
Unlike DB pension schemes, the plan is usually run by a pension company rather than your employer (although your employer may also match your contributions up to a certain limit), and your money is invested into a range of funds.
The size of your pension pot at retirement will be based on the money you have paid in and the performance of your investments, plus any charges applied by the provider. Your retirement savings will get an extra boost as tax relief is paid on your contributions, with the amount you receive depending on the rate of income tax you pay.
One benefit of a DC pension is the flexibility it offers, allowing you to access your savings in a number of different ways. However, there are no guarantees when it comes to how your investments will perform or the size of your pension pot at retirement.
Why should I speak to an adviser about all this?
Advice is really important because everybody’s needs vary when it comes to planning retirement. There are many different ways to create your retirement income using the pension types that are described above and an adviser can help to create a retirement plan to use them in the most efficient way possible.
If you would like to discuss retirement planning with a member of the AAG team, please leave your details below.