Do you want financial security in your future? Understand your pension.

Understanding pension planning can prepare you for a secure retirement.

With so many financial considerations in the short to medium term, it can be hard to look past our current needs and ahead to less immediate questions like retirement plans. However, the sooner you start to prepare for retirement, the more comfortable and secure your finances will be. To make sure your funds are doing the most for you, it is important to review the pension plans available to you – those you are currently on, and your other options – and to select the right plan for your situation and goals.

Exactly how does a pension work, what schemes are available, and what risks is your current plan taking? The questions can be overwhelming, which is why we recommend speaking with a professional pension advisor like ourselves to guide you through the process.

Whether or not you speak with a financial pension advisor, however, it helps to know what sort of options are out there, and the sorts of choices you are looking to make. That is why we have broken down some of the main types of pensions in the UK, and the benefits and considerations involved:

What is a pension?

A pension is a financial arrangement designed to provide individuals with a regular income after they retire. Pensions are funded through contributions made by you, your employer, or both. The primary purpose of a pension is to ensure financial security during retirement.

Pension planning is an important process to engage with sooner rather than later, so you contribute to a beneficial plan for you during as much of your working life as possible.

There are several types of pensions available in the UK:

1. State Pension: This is a regular payment from the UK government that you can claim when you reach the State Pension age (currently 66 years for both men and women). The amount you will receive depends on your past National Insurance contributions and will also depend on whether you are on the Old or New State Pension. You can check which State Pension you are on and when you will receive it using this checker from the GOV.UK website.
2. Workplace Pensions: These are pension schemes set up by employers. There are two main types of workplace pension scheme:
   • Defined Benefit (DB) Pensions: These provide a guaranteed annual income based on factors such as salary and length of service. The employer is responsible for ensuring there are enough funds to pay the promised benefits.
   • Defined Contribution (DC) Pensions: Contributions are invested in a pension fund, which relies on investments. The final value of the pension depends on the amount contributed and the performance of these investments.In the case of a DC pension scheme, it is wise to make yourself aware of what your pension fund is investing in the and degree of risk this carries.
3. Personal Pensions: These are private pension schemes that you can set up independently of your employer, with the assistance of a pension advisor. These include:
   • Stakeholder Pensions: A type of personal pension with low minimum contributions and capped charges.
   • Self-Invested Personal Pensions (SIPPs): SIPPs offer more flexibility in terms of investment choices, allowing you to manage your pension investments more actively.

State, Workplace & Personal Pensions: The differences

High vs Low Risk Pension Plans

If you can, it is always wise to supplement any state and workplace pension schemes with your own, personal pension planning. Whilst contributions are not provided by your employer, there are still a number of incentives on personal pension schemes that support your saving and planning: speak with one of our experts about your current finances and goals to find the best scheme for you.

However, as the table above shows, Personal Pensions and DC Workplace Pensions carry risk, based on the type of investments your pension contributions are spent on. SIPPs allow hands-on control over your pension investments, but this level of control also calls for a knowledge of the choices you are making; even in less hands-on schemes, it is helpful to have an understanding of which investments carry the most risk, so you can check whether you are happy with the schemes you are on.

So what determines pension risk?

Investment Choices:

• Whilst risk varies product by product, typically high-risk investments include stocks, equities, emerging markets, and certain types of volatile bonds. Whilst these investments carry greater risk, they have the potential to pay out at higher returns.
• Lower-risk investments generally include government bonds, high-quality corporate bonds, and cash or cash-equivalent investments. These are usually more stable, which can be important in an unstable market: however, the trade-off on this is lower returns.

Diversification:

• We’ve all heard the expression “Don’t put all of your eggs in one basket”. A well-diversified investment portfolio spreads risk across different asset types, areas of the world and industries; this reduces your risk by spreading the impact of any unexpected poor performance in one of these areas.
• Find out whether your current investments are in one area or spread across several. If they are all in one area, consider getting in touch with one of our pension advisors to see how you can protect yourself and spread the risk.

Fund Management:

• As discussed, an actively managed fund like a SIPPs scheme is more work and can carry greater risk but can lead to larger pay-outs if managed correctly. Passively managed funds generally have lower risk but might also offer lower returns.
• If you are interested in an actively managed funds, it is advisable to work alongside a financial consultant.

It is important to know what type of pension plans you are currently on, what your future finances currently look like, and how these measure up to your goals. Whilst it pays to begin pension planning earlier rather than later, don’t panic – it is never too late to start. Find out how ML helped Steve and Beth begin planning in their 50s. Speaking with a pension advisor can give you an accurate idea of your current situation and available options, so you can make the best choices now to get your future to where you want it to be.

Don’t take risks in pension investment alone: speak with an expert from ML Financial Associates, and we can offer experienced, independent advice to set you up for a retirement that is financially secure.

You can contact our Wymondham office on 01953 711123, or our Northampton office on 01604 726684.