For most of us, the two main assets we will ever possess, are our house and our pensions. The former is easy to understand. A net income/expense calculation can provide us with clarity whether we are living efficiently or not. The benefits it provide are simple to understand. It is a tangible asset which one can view, improve and retain ongoing use from. Pensions are a lot more abstract.
What makes pensions even more difficult, are the applicable legislative provisions which govern them. My dad always taught me that there were two things which are certain in life; death and taxes. After being in the industry for close on 10 years I can add the fact that the pension legislative landscape will change to my father’s limited list.
Many people do not understand their pension statements. Furthermore, every person has different objectives and hence would value different aspects of their pensions to varying degrees. Here are some basic things which one should consider when viewing their pensions
- Any other retirement provisions. One should take all their retirement provisions, including state pension entitlement into account. This will provide a complete picture of what one can expect.
- What is the best investment strategy for your pension? Is the current strategy suitable to your own personal objectives. Being too risky close to retirement is almost as bad as being too cautious with many years to lapse. Is the investment strategy aligned to your retirement time-frame?
- What options are available for you to take benefits? There is an array of options available. Do you want a fixed income for life, increasing/not with inflation. Do you want a pension commencement lump sum and what impact would this have on your pension income. Do you want flexible income, and if so how would you like this to be taken. Furthermore, are you aware that by taking a pension commencement lump sum will eliminate the possibility to take a series of (partial) tax free payments later in life.
- What (if anything) of your pension will be available for your family? As mentioned, above, death is a certainty of life. The majority of the pensions will have some form of being retained for your spouse, however, these options vary greatly. Do you know what your death would mean to your pension. Can you pass this onto your family members, and if so who qualifies for such receipt of pension benefits.
- Do you understand the tax position? Once again, another certainty taxes. However, the tax treatment of pension benefits (especially upon death) is rather complex. Depending on the age upon which you die this may have huge consequences for the tax position of the remaining pension benefits you may be able to pass to your family members.
- Finally, have you consolidated the pension benefits or not? In the UK there is a lifetime allowance which is the maximum amount of benefits a person can receive from UK registered pension benefits. If you have already received pension benefits, then it is critical to know your remaining lifetime allowance and how the benefits will be calculated in light of this restriction. Also, if you exceed the lifetime allowance (and do not hold any transitional protections – another story in its own right); then are you aware of the tax implications which would arise?
As you can see understanding a pension benefits statement is not only understanding the amount of money/benefits one can expect. There are a lot more factors which need to be considered.
Due to the above I would strongly recommend speaking to a qualified financial advisor, and preferably a qualified pension transfer specialist who can guide you into the complex world of pension benefits and the taxation thereof.