When I hit 40, I was alarmed to realise that my pension was no longer a long-term plan. Given I could theoretically retire at 55,1 suddenly this seemed decidedly medium term. Like many people these days, I’ve had a patchwork career comprising many different employers and a few periods of self-employment. I’d acquired a few pension pots here and there but wasn’t really sure they would keep me in gin and cat food. Although I’m a keen planner and wanted to get started, part of me was afraid. What if there isn’t enough? Will I have to fight the cats for their food? How on earth could I predict what would happen over the next 50 years?2
From talking to friends and colleagues, this is a common situation. We’re acutely aware that we should be doing something about retirement but feel overwhelmed. After all, pension planning means confronting our own mortality and putting aside large chunks of money for an uncertain future. I’ve spent the last five years learning everything I can about long-term investing and life choices. Although I’d previously worked in finance and also have a PhD, I found much of the information confusing. My motivation in becoming a financial coach was to simplify the process for other people.
In this post, I’m going to talk you through a Pension Healthcheck so you can see what provision you already have in place.
Occupational or Personal Pensions
The first step is to dig out those old pension statements (they’re probably in a carrier bag). This paperwork should give you a predicted income based on the company’s standard pension age (this might differ from the state pension age). It’ll be lower if you decide to retire earlier.
There are a few things to look out for:
- Final salary schemes – also known as Defined Benefit. You receive a guaranteed amount until you hop the twig. There might be additional perks, too, such as a widow’s pension for your spouse (usually much smaller than what you’d receive) and life insurance cover. If you weren’t in the scheme for long, the predicted income is likely to be tiny. However, it’s guaranteed and paid until death.
- Defined contribution schemes – sometimes referred to as Money Purchase. Your money sits in an investment pot that grows and shrinks according to the whims of the stock market. On reaching retirement, you can withdraw 25% tax free, then you need to decide what to do with the rest of it. There are no guarantees this time – it’s your responsibility to make it last throughout your retirement. This is why Final Salary schemes are highly prized.
If you can’t find any statements or letters, try the Government’s Pension Tracker. You’ll need the name of your previous employer or provider to use it. The tool won’t tell you whether you have a pension pot, but you’ll get the contact details of the company’s pension administrators. Personal pensions are trickier to trace as you’ll probably have forgotten the details. Have another look for any paperwork or locate a bank statement that shows the provider’s name.
Opinion is divided on the state pension (and on everything else at the moment). Some believe it’s unlikely to survive the next decade, while others insist the Government wouldn’t be foolish enough to take it away. Those in the latter camp are usually the people who are depending most on the state pension. I think it’s unlikely to disappear altogether – that might provoke civil unrest and cause widespread poverty – but there’s a palpable risk that its value won’t keep pace with the rising cost of living. The pension age has already been subject to well-publicised and poorly received increases.3 and the Government makes no guarantees that they won’t be bumped up again.
The state pension is further complicated by the fact that not everybody gets the same. It depends on a number of factors:
- Your age
- Whether you were in a company pension that contracted out of SERPS
- Your National Insurance contributions
If you were born after 5 April 1953, you need 35 years’ worth of NI contributions to receive the full state pension – currently £164.35. Anyone who has experienced unemployment for any reason and didn’t sign on for benefits might not receive the full pension. This also applies if you were self-employed and missed some NI contributions.
You can easily check your state pension entitlement through the Government Gateway. Enter your details and you’ll see a prediction based on your continuing to make contributions.
Any gaps are flagged, and you also get the opportunity to make a retrospective contribution to ‘buy’ extra years’ pension.
If you can’t afford to plug the gaps, you’ll have to settle for a lower pension. There is currently a means-tested pension credit for those on very low incomes, but it’s vulnerable to changes.
It’s too complicated to unravel the complexities of the state pension system here. If you have any concerns or questions, you can receive free impartial advice from The Pensions Advisory Service.
Retirement isn’t just about pensions. You might have other assets that’ll provide you with an income: ISAs, stocks and shares, or a buy-to-let property. The advantage of these assets is that you can usually access them whenever you want, unlike a pension pot. And income from your ISA is tax-free.
Many people view their main residence as a pension pot. There are a few problems with this approach:
- If there’s a downturn in the housing market, you’ll find it difficult to release your capital
- Equity release schemes aren’t right for everyone. See the Money Advice Service guide for sensible advice on the potential pitfalls.
- You might not want to move house. We often overestimate our willingness to make big changes in the distant future.
- You’ll still need someone to live!
So, focus on the assets that you can easily sell or access without causing major disruption.
Hopefully, you’ve now got a clearer sense of the funds available to you on retirement. Perhaps you’re pleasantly surprised? If not, don’t worry. In future posts, we’ll explore some ways of boosting your assets. We’ll also consider how much money you’ll actually need in retirement. You might not be swanning around the world in your own yacht, but taking action now could ensure that you’re comfortable and secure.
As a financial coach, I can guide you through the process of your pension healthcheck. By explaining the options available and using forecasting tools, I support you in making an informed decision that’s suitable for your situation. I never recommend a specific product or course of action. If you require advice rather than coaching, you need to see a qualified financial advisor. They’ll either recommend products on which they receive commission, or you’ll pay a fee for independent advice. Please contact me if you’d like a free 15-minute chat about pensions or any other aspect of financial wellbeing.