EACH week The Scotsman will give you a top ten guide to pertinent financial issues.
With the plans of millions of pension investors thrown into chaos by nearly two years of stock market volatility, there has never been a better time for anyone remotely near to retirement age to review their retirement provision. Bruce Saunderson, se
nior manager in financial planning at Grant Thornton, shares his top tips for keeping your pension plans on the right track.
1 Take independent financial advice This is the only way to ensure you have all the information available to make an informed decision on your pension plans. A suitably-qualified IFA will be able to give you advice on recent legislative changes, such as the change in the retirement age from 50 to 55, which comes into effect in April 2010. Seek the services of a fee-based adviser, rather than one paid via commission, as this will ensure that you get totally impartial advice. Ask for details on their qualifications to check that they have specialist pension expertise.
2 Get a state pension forecast This will help you to plan your finances and look at whether you need to save more by topping up your national insurance contributions. Your financial adviser can help on this or you can contact the Pension Service direct on 0845 6060 265 for a state pension entitlement quote.
3 Shop around for an annuity Most of your pension fund will be used to provide income in the form of an annuity. At retirement, you can transfer your fund to a new provider offering the best rate to suit your circumstances – you are not obliged to draw your income from your current pension provider, but using what is called the Open Market Option, you are allowed to look for the best alternative on the market.
Enhanced annuities are also available for those who have lower than average life expectancy, perhaps because they are smokers or suffer from ill health.
4 Stay balanced A pension is a long-term contract and you may have other planning needs. Alternatives to pensions, such as individual savings accounts and National Savings Certificates, which also carry tax advantages, may be used for other planning needs as well as retirement provision.
5 Check the charges Older pension contracts can carry a range of charges and are often expensive, whereas some newer contracts offer discounts on their annual charges. Speak to your IFA as you may benefit from consolidating your arrangements. Beware of any transfer penalties, however, especially regarding with-profits funds. Some older contracts carry valuable guarantees at retirement which may be lost on transfer.
6 Take control Some investors could consider establishing a self-invested personal pension (Sipp). This allows you to hold a wide range of assets and know exactly where your money is invested. Sipps may hold any collective investment fund, individual shares and commercial property.
Consider the benefit of your business paying rent to your own pension fund. Be wary, though – Sipps carry additional charges and many "off the shelf" contracts have a wide range of funds managed not only by the pension provider but other external managers. Again, seek advice, as Sipps are not suitable for everyone.
7 Attitude check As you draw closer to retirement, you should review how much risk you are taking and think about switching to less risky investments.
Consider your investment policy even if you are years away from retirement, and constantly check that it continues to reflect your objectives and attitude to risk. Also keep your investments diversified – studies prove that it is the mix of assets in which you invest that reduces risk and generates returns.
8 Use a trust The value of your pension fund plus any death-in-service insurance you have from your employer is payable free of inheritance tax (IHT). If you simply nominate your spouse or civil partner to receive the funds they will then form part of their estate for IHT.
The pension death benefits you have, plus any other life policies, can be paid to the trust with the survivor having access but the funds then passing to the next generation in a more tax efficient way.
9 It's never too early Parents and grandparents can establish stakeholder pensions for any children and grandchildren. By creating a pension for your offspring at a very early age and paying into it on a regular basis, you are maximising the chances of them eventually enjoying a financially comfortable retirement.
10 Speak to your employer Request information from your employer on your company pension. Ask for details on all investment options and details of how to make top-up contributions. Joining a new company brings with it lots of change, so your pension investment policy may have seemed unimportant at the time.
Consequently you may find yourself in the "default" investment option. This might not be appropriate to your circumstances and could cost you valuable pension contributions.
