Do you need a financial adviser to manage your pension?

Since the introduction of the 'pension freedoms' in 2015, over 7 years have passed, allowing retirees increased flexibility in managing and utilizing their pension funds according to their preferences. Consequently, individuals are now confronted with crucial choices both before and during retirement that will impact their financial capacity to sustain their desired lifestyle and goals post-employment.

Let us start with a brief explanation of what a pension is?

In essence, your pension is a fund where both you and your employer contribute money that will support your retirement. One of the main benefits of investing in your pension is the tax relief provided on contributions, which is set at 20% for those on the basic tax rate, 40% for higher rate taxpayers, and 45% for additional rate taxpayers.

Pensions typically come in two forms - ‘Defined Contribution (DC)’ or ‘Defined Benefit (DB)’.

Here’s how they work:

Defined Benefit pensions

This particular plan provides a fixed yearly income throughout retirement, primarily financed by the employer, with the possibility for employee contributions over the course of their career.

It is available in two variations: the first being a 'final salary' scheme that grants a retirement income relative to a percentage of the individual's final salary, and the second being a career average revalued earnings (CARE) scheme, which offers an income based on the average salary earned throughout the person's career. In both cases, pension payments are adjusted in accordance with inflation.

Defined Contribution pensions/Personal Pension Plans

These pensions, also referred to as money purchase schemes, do not guarantee a fixed payout in retirement. Instead, individuals and their employers are responsible for making contributions to gradually grow the savings fund. In a workplace scheme, the individual determines the percentage of salary they want to contribute to their pension, and the employer may match some or all of these contributions. The implementation of auto-enrolment has promoted pension savings. Conversely, in a private pension, individuals are solely responsible for making contributions.

Can I manage my pension myself? A popular type of defined contribution pension is a Self-Invested Personal Pension (SIPP), which provides an individual with the flexibility and autonomy to hold the investments they wish within a pension ‘wrapper’. This contrasts with a final salary scheme, where the individual has no control over how the investments are managed. The following investments can be held within a SIPP:

• Funds

• Shares

• Exchange-traded funds (ETFs)

• Investment trusts

• Gilts and corporate bonds

• Cash

• Commercial property

If you decide to take the DIY route with your SIPP, it will be your responsibility to select the underlying investments for the portfolio via a broker or platform.

If you prefer for someone else to manage your SIPP, you can appoint a financial adviser or wealth manager.

It is important to note that with freedom comes responsibility, so it will be down to you to make sure you have enough income to fund your retirement – something that can be achieved by adopting a ‘drawdown strategy’.

This means drawing a variable income directly from your portfolio and keeping some money invested in the stock market during retirement. The aim is to grow your income, hopefully as the value of your investments increases over time.

An alternative is to take out an annuity, where an individual exchanges their pension for a secure income for life. These can be inflation adjusted and are based on current rates at the time. These are generally provided by insurance companies.

When should you consider getting professional pension advice from a financial adviser?

There are a number of scenarios where it could prove useful to seek more tailored advice from a financial adviser.

In the examples below, financial advice is not mandatory, but it could prove beneficial:

Leaving your pension in a will Since the pension freedoms were introduced in April 2015, it has become easier to leave some or all of your pension to loved ones. The best part is this can be done in a tax-efficient manner. For example, if you die before the age of 75 your beneficiaries will not have to pay any tax if they cash in the pension pot. After the age of 75, beneficiaries can still inherit the pension free of tax if it remains invested. However, if they want to draw an income from it or cash in the whole thing, they will have to pay income tax on the amount they take out. From the age of 55 you can take up to 25% of your pension pot tax-free, so it could make sense to take this lump sum before you turn 75. After this point, it becomes part of your estate and is therefore subject to inheritance tax. Older pension schemes may not allow you to pass on your pension within your will. A financial adviser can give you a clearer idea of what is possible, helping you to get your affairs in order with the aid of other professionals, such as accountants and solicitors. They can also guide you on how much you can afford to leave to loved ones.

Investing your pension to get adjustable income It may make sense to take an adjustable income from your pension pot during retirement. Also known as ‘flexi-access drawdown’, this is only possible with defined contribution schemes. After the 25% tax-free lump sum is taken, the remaining 75% of your pension pot is invested in funds/shares that allow you to take a regular income (which is then taxed at your marginal rate). Your investments will be guided by your objectives, requirements and attitude to risk. In addition, the investment strategy can be adjusted over time, in line with your circumstances and the performance of your investments. A financial adviser will be able to provide some guidance on how much income you are likely to require. If you aren’t an experienced investor, they can also construct an investment strategy that focuses on delivering the income you require. Combining pension options It may make sense to combine pension options. For example, by using some of your pot to buy an annuity and investing the rest to generate an adjustable income. If you are thinking about the practicalities of doing this, you will need to explore whether your pension provider offers both options. Alternatively, if you have two pensions you could buy an annuity with one pot and invest the other. The most important thing is to have a clear financial plan in place. This will be led by your objectives and the estimated amount that is required during retirement. You may wish to consult a financial adviser to put a financial plan in place or to discuss the implications of combining different pension options. Changing your pension contributions The level of contributions into your pension will be driven by a range of factors. These include how much you can afford to put in, the amount of retirement income you are targeting and the age you wish to retire at. It is also important to consider the tax relief that is available on contributions. During the 2023/24 tax year, you can receive tax relief of up to 100% of your earnings or a £60,000 annual allowance – whichever is lower.

When must you seek professional pension advice from a financial adviser?

Financial advice is either strongly recommended or it can represent a legal requirement in the scenarios outlined below:

Do I need a financial adviser to make withdrawals from my pension?

Since the pension freedoms were introduced in April 2015, it is possible to cash in all or some of a defined contribution pension pot from the age of 55. Once the 25% tax-free lump sum has been taken and your Personal Allowance (equating to £12,570 during the 2023/24 tax year) has been used up, any withdrawals will be taxed as income.

It is important to think about the tax implications associated with making withdrawals; a financial adviser will be able to provide you with some insight on this. For example, if a substantial proportion of your pot is withdrawn in one go, it could push your tax rate up.

Think carefully about the impact this could have on the amount you ultimately receive.

Here are four different approaches to taking withdrawals from your pension:

• Take your 25% tax-free lump sum and leave the rest invested until you need it at a later point.

• Withdraw some of your lump-sum tax-free and leave the rest invested in the hope that your investments continue to grow over time. Of course, the opposite can happen, and your investments can also go down. This strategy is known as partial drawdown

• Withdraw more than your 25% lump sum, which means you will have to pay income tax on the amount above the 25% threshold. The rest of your pot then remains invested until you need the money later.

• Uncrystallised Funds Pension Lump Sum (UFPLS) – you take your 25% tax-free lump sum in stages and pay tax on the remaining 75% that is withdrawn. This strategy is typically used if a pension scheme does not allow you to go into drawdown. Alternatively, there may be tax benefits associated with taking your tax-free cash at various points.

Do I need a financial adviser to buy an annuity?

It isn’t mandatory to consult a financial adviser if you are thinking about buying an annuity. Nevertheless, many people find it useful.

For those who are happy to select an annuity by themselves, the first step is to choose which type of annuity works best. There are two main categories:

1. Basic lifetime annuity – where you specify an income from the outset

2. Investment-linked annuities – this means your income will be linked to the performance of underlying investments, so it could fluctuate. However, it will not fall below a guaranteed minimum.

The amount paid out by the annuity will depend on your health and age. For example, if you are older or have a medical condition, you will receive a higher income (annuity rate). This reflects lower life expectancy.

There are a number of online annuity comparison sites available, however, some annuity providers do not offer quotes online, so the websites aren’t necessarily showing you the whole market.

This is where a financial adviser can come in useful because they can help you to find a better rate. They can also provide guidance on which annuities are most suitable, given your circumstances.

For those who are keen to take the DIY route, there are two main obstacles to be aware of.

The first is that some of the more commercial annuity comparison websites charge commissions for arranging the product, so it is important to look out for these and consider how they compare to a financial adviser’s fee.

Secondly, many providers won’t provide a direct quotation and require the individual to receive financial advice before they sell the annuity.

Do I need a financial adviser to cash in my pension?

Retirees with defined-contribution pensions now have the freedom to cash in their entire pension pot from the age of 55. Of course, there are tax implications associated with this course of action, so it is a good idea to seek financial advice before taking this decision.

Cashing in your pension to buy big-ticket items or to clear debts will affect the amount that is available for you to live on through retirement, so this must also be considered.

Legally, individuals are required to seek financial advice if they wish to cash in a defined contribution pension that is worth more than £30,000, where there is a guarantee about the amount that will be paid when they retire. For example, through a guaranteed annuity rate.

If your pension pot is less than £30,000 and does not have a guarantee regarding income, it could still be a good idea to seek financial advice before you cash it in – not least to consider the long-term implications and potential tax liabilities.

If you are considering transferring your defined benefit pension over to a defined contribution scheme, you are legally required to consult a financial adviser if your pot is more than £30,000. If you are advised to proceed, you will be given a transfer value, and this will then be converted into a lump sum and transferred into a defined contribution pension.

How much will a financial adviser charge for pension advice?

The average cost of an initial review stands at £500, according to research produced by Unbiased. Meanwhile, for a £200,000 pension pot there was an average at-retirement advice fee of £2,500. The average hourly rate for a UK adviser is £150, according to Moneyhelper. However, some advisers charge as much as £300.

At Coleridge Capital they do not charge any initial fees to review your pensions and to provide you with a personalised report of suitable options.