Understanding the complex world of personal pensions

Being retired is like having a lifetime of Saturdays stretching out before you. Having enough money saved to no longer have to work is an incredible freedom. What would you do with your days if you didn’t need to work to pay the bills?


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The prospect of endless work-free days may seem unrealistic when you’re head down in spreadsheets or prepping for another conference call. And it’s fair to say there’s a lot of negativity about pensions in the press, from the hubbub over tax rules to the rising state pension age.

But for many working professionals, being able to retire in your 60s, 70s and beyond is an achievable aim. You only have to look at the growth of the financial independence retire early (FIRE) movement - where people live on the tightest budgets and strategically build their assets, with the aim of stopping work as young as possible - to see that it can be done. (Although most people aren’t planning to quit work in their 40s, so embracing minimalism and extreme frugality isn’t necessary!)

The days when businesses and the state supported individuals through their grey-haired years are long gone, meaning it’s now up to each of us to make our own plans

Achievable doesn’t mean easy. Planning for retirement is a science; a pension calculator can spell out how much you need to put away each month and the rate of return your investments will have to reach. But it is also an art; no algorithm can tell you which of the plethora of accounts to use, from SIPPs to Lifetime ISAs, workplace schemes
or properties.

Previous generations had a huge advantage over today’s working age population: their retirement planning was largely done for them through generous final salary pensions and public sector schemes.

The days when businesses and the state supported individuals through their grey-haired years are long gone, meaning it’s now up to each of us to make our own plans. That’s a greater burden undoubtedly - being well-versed in pensions and saving hard are essential - but it also means potentially greater freedom when it comes to choosing what to do with your assets post-65.

For example, final salary and public sector pensions (known as ‘defined-benefit schemes’ in industry jargon) gave retirees a fixed amount of money for life. They were fantastic in terms of assured future income, but inflexible for people who wanted to withdraw a bigger chunk of savings to purchase property, gift to children or travel the world.

Be open to options that may be particularly well-suited to your pension plans such as managed portfolios or passive investments

Those sorts of pension arrangements are an endangered species today. Most younger workers will be paying into so-called ‘defined-contribution’ schemes, where the individual can decide how much to contribute each year, where it should be invested and how much they want to withdraw each year in retirement. None of those decisions have to be made once - contributions and withdrawals can be changed from year to year, much more like a bank account.

Becoming confident that you’re able to make these decisions and be financially stable in the decades to come means rethinking a few things.

Shaking off the notions of what ‘retirement’ is

Pensioners, retirement and the fuzzy concept of ‘saving for later life’ often bring to mind some stereotypes: cruise ships, bingo halls and drinking sherry. Much as we love the senior citizens in our lives, we find it hard to picture ourselves reaching that age or being part of that culture.

The good news is that you will, in all likelihood, get to that age (no point fighting it) but the current generation of working people won’t age the same way our elders did. Each generation takes some of their hobbies and habits with them into old age - so ‘retirement’ in 30 years will be more about craft beer, adventure travel, oat lattes and crossfit. You will want to have enough money to keep on doing the things you love, and that means retirement planning needs to start decades in advance.

Not being put off by the jargon

Like many industries, pensions and retirement planning have developed their own vernacular over the past 50 years, which can bamboozle the uninitiated. Jargon terms such as ‘crystallisation event’, ‘money purchase scheme’, and ‘lifetime allowance’ actually describe quite simple concepts that anyone can understand – so don’t be daunted.

Knowing that investing in pensions is a different kind of beast

You may know a good deal about investing and already have stocks and shares ISAs, or other assets. Although the golden rules of investing are the same with pensions as with ISAs – invest for the long term in things that are easily understandable, while keeping an eye on fees – there are some key differences.

Investing for a retirement that begins 30 years from now requires a different strategy to investing for a property purchase in five years’ time. Over those three decades your tolerance for risk changes, alongside your need for growth-focused versus income-producing investments. Plus the investment charges mount considerably with the sheer size of your pension, which is usually the biggest asset most people have after their home.

So be open to options that may be particularly well-suited to your pension plans such as managed portfolios or passive investments, even if you may not use them elsewhere.

Of course – this is just scratching the surface of the complex world of personal pensions. If this article has given you food for thought, or you would like understand more fully how crystallisation events, money purchase scheme or the lifetime allowance could affect your pension planning then join us at Nutmeg’s free ‘Understanding the pension lifetime allowance’ webinar at 5pm on 26 April. You can register at nutmeg.com/webinar.


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