Take a SIPP from the pension cup
Pension funding… Probably not something you spend much time thinking about. But it’s something we think a lot about. Especially when one of our readers asked us recently how could an adviser add value to her pension fund?
Traditionally retirement funds or policies have been built up over time and then policyholders have been invited to buy an annuity at retirement to provide an income from then on. Recently, however, people with these policies have become frustrated that annuity rates have fallen considerably over time, meaning that their retirement income has fallen far below that which they expected to receive when they originally took out the pension funding policy.
This is bad enough, but there are other problems that can arise. If you are married and you want your spouse to receive an income after your death, you will have been obliged to purchase a ‘joint life’ annuity. This results in a far lower level of income being paid by the life company right from the start.
Furthermore, if you want your income to increase over time, or be linked to one of the indexes measuring inflation (either the Retail Prices Index or the Consumer Prices Index) the level your income starts at from retirement is reduced even further. It doesn’t make pension funding or retirement something to look forward to.
But you don’t have to buy an annuity.
You might not have realised, as it hasn’t been shouted about very much, but instead of giving your retirement fund away to a life company in exchange for an annuity, you could transfer it to a Self Invested Personal Pension (SIPP) and appoint an investment manager to help produce the income.
Even better, you don’t have to wait until you retire to do this. It can be done straight away and the fund can be managed with the potential to far exceed the growth you would have got from a more traditional with-profits or managed life fund policy.
A SIPP can also be helpful when it comes to tax planning. With a SIPP, the fund stays within your estate instead of giving it to a life company, and after your death, your surviving spouse can continue to receive exactly the same amount of income, rather than relying on a joint life annuity.
When funding your pension, your fund can also be protected against inflation if you have an adviser who is managing the fund effectively. On second death, there is no inheritance tax on the fund and you can leave the remainder of the fund to their children or to charity.
Pensions legislation is complex, and if we’re honest, not terribly exciting, but if you’d like it explained in clear, straightforward terms, talk to your independent financial adviser.
When it comes to appointing an independent financial adviser to help your pension funding, if you haven’t already done so, we’d suggest you choose an adviser who possesses the knowledge, correct investment strategy and independent research process. Ask your adviser about his or her qualifications and they should be happy to discuss them with you.
Be wary of advisers who rely on managed life funds for pension funding, which are unfortunately ‘pseudo-tracker’ funds, simply tracking an index such as the FTSE100. In contrast, all managed funds spread their investments across a wide range of geographical areas and assets. They spread their bets as they don’t hold expertise in all sectors. Our theory, backed up by our independent investment research, is that it is much better to use the best manager in each sector.
What you should expect your independent financial adviser to do is to offer you a confidential financial review. This will decide what you are prepared to risk in pursuit of your long-term objectives and how much volatility, i.e. movement in the markets, you are comfortable with.
This allows you to have a bespoke, truly individual portfolio, to help you achieve the income you want for your retirement.
For a free pension consultation, call Chris Rowe on 0845 230 9876 or e-mail firstname.lastname@example.org.
The value of shares and investments can go down as well as up.