AS A FINANCIAL PLANNER, my role is to help you build a financial plan that is bespoke to you to help you achieve your goals and objectives, whatever they might be.
More often than not, those goals revolve around retirement and pension planning. If you desire a quiet, serene retirement in the country, fantastic. If it’s buying that yacht and spending a couple of years travelling the world, great. The key is to have a vision – and then I’ll help you to get there.
Many of you will have existing pensions from your time working in the UK (or elsewhere), and it amazes me how many pensions have been forgotten, lost, or just simply left unattended for years. Pension planning is a core part of a financial plan, and with that in mind, let’s outline some basic considerations for you here.
WHAT’S THE DIFFERENCE BETWEEN FINAL SALARY (DEFINED BENEFIT) SCHEMES AND DEFINED CONTRIBUTION SCHEMES?
A final salary or defined benefit (DB) pension is one where the amount of pension you’re paid is based on how many years you’ve worked for your employer and the salary you’ve earned. They then pay you a guaranteed, inflation-proof income for life. Your income is not subject to investment performance of your individual pension, as your previous employer pays the pension and you do not have to make contributions.
These types of scheme are rare these days because the benefits are so good. However, you might have accrued a DB pension from a previous employer, and there are a few companies who do still offer them.
A defined contribution (DC) pension, on the other hand, is one which has an investment value that fluctuates over time. It is built up by you and your employer making contributions to the scheme. The income that you draw from the pension in the future is up to you, but will be dependent on the size of your pot. Income is, therefore, not guaranteed and is subject to the investment performance of your pension.
It is quite common for people to have a combination of DB and DC pension schemes from previous employment, and keeping track of them can be a challenge.
I’VE BEEN CALLED ABOUT TRANSFERRING MY DB PENSION, SHOULD I DO IT?
As always, this very much depends on your personal circumstances.
Transferring a DB pension means you take the value offered by the scheme (called the cash equivalent transfer value, or CETV) and transfer it to a DC scheme, taking on investment risk and giving up the guaranteed income.
With interest rates at historic lows, CETVs of DB pensions are currently very high and seemingly very attractive. However, because the guaranteed income is so valuable, under almost all circumstances, the Financial Conduct Authority believes the pension shouldn’t be transferred unless there is a compelling reason to transfer and give up the guaranteed income. In order to transfer a DB scheme, advice has to be given by a UK regulated adviser, which typically costs £2,500 just for a report – and the advice may still be to remain in the scheme.
WHAT ABOUT MY DC PENSION(S)?
There are many reasons to transfer your DC plan(s) into a Self-Invested Personal Pension (SIPP). Some of these reasons might be:
- Consolidation of pension plans to reduce administrative burdens
- Increased investment options for potentially greater performance
- Active management and ongoing advice
- Increased flexibility and retirement options
Whatever the reason, it is vitally important to take advice before transferring any pension and I typically advise people to also get a second opinion on the recommended destination for the pension transfer.
Unfortunately, there are still plenty of so called ‘advisers’ recommending that pensions be transferred into high commission-paying products with undisclosed fees. It goes without saying that these should be avoided, but they’re not always obvious, so a second opinion is invaluable to ensure the advice is clear, fair, and not misleading.
The key to pension planning is to team up with a trustworthy, qualified financial planner to help you build a robust, holistic financial plan, and then ensure you’re on track by regularly reviewing the plan.
If you have questions around pensions that you might have, would like existing pensions reviewed, or would like a second opinion on a recommendation that you’ve received, please feel free to contact me.
Jamie is a Chartered Financial Planner and strives to raise the standards of international financial planning in Malaysia and Asia.
You may direct any inquiries to [email protected] or call +6014-734 6689.
A version of this article was initially published in the May 2021 edition of The Expat.
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