To find pensions baffling?(10 Posts)
Part of this is a general moan about how complex pension schemes seem to be. I am not financially illiterate at all, but have never, never understood pensions (which is why I hold investments outside of my pensions so that I have an income on retirement that I do understand!).
1. A final salary pension which I built up for 6 years at one firm before leaving in my 20s. No idea what will happen with this when I get to retirement age.
2. A small defined contribution pension from a firm I worked for for 2 years and then transferred to a Hargreaves Lansdown pension.
3. I have just been made redundant from my most recent firm, after having been there for 8 years, and have a pot worth just over £30k with Legal and General.
Pension advisers want to charge me ridiculous amounts when I'm not even sure I need to do anything.
I am now self employed, and do not wish to pay into a pension scheme (I have other investments I manage myself), but have no idea what to do with these three pension pots (if anything). I am frustrated at how complicated it is!
1. When you get to retirement age it will pay you an annual pension. That pension will be worked out using a pre-defined formula based on your salary when you left (which will be increased to some extent to go some way to offset inflation) and the 'accrual rate' of that scheme. You should get a statement each year which tells you how much that pension is likely to be worth. Final salary pensions are generally considered to be very good deals and you should think extremely carefully about ever converting it to a defined contribution pension. Most people leave them well alone.
2 and 3 will sit there until retirement age when you can (depending on the terms of the policies) take them all as cash or use them to buy an annuity which pays you a guaranteed amount for life. The value of those pots is dependent on investment returns and their value can go up and down - unlike the final salary pension you are not promised a particular amount. Things you might consider doing with these now include looking at the fees they charge and investment options and considering whether to transfer them to a different provider.
I think you should consider financial advice, as even if it costs £1k it could gain you way over that in the long run. The following is my understanding and I am not a financial advisor.
Pension savings are normally good because you don't pay tax on the amount you put in. If you were an employee the company would also put money in too.
Ask the final salary scheme what you have qualified for. That is sort of fixed/promised as isn't dependent on the fluctuations of the stock market.
Find out if you can continue to add to the L&G scheme or is it tied to an employer?
Consider merging 2&3 (maybe into the Hargreaves Lansdowne one) and keep adding to it.
It really isn't that complicated
- you get tax breaks for saving into a pension scheme
- but you can't access the money until you are older
- you can cash in for an annuity (guaranteed money for life) or draw down income from the savings
Final salary pensions pay out an income at retirement based on your salary when you left the scheme and how many years you paid in for - the actually amount you paid in isn't important - it's the time and salary at the end of employment. They accrue at a rate (something like a 60th if your final salary) per year you worked there. So, say you leaving salary was £30,000 and your accrual rate was 60ths, you'd have accrued 30,000 / 60 x 6 years of employment = 3,000 per year. Usually something like 40 years' service will get you 2/3 your final salary.
The defined contribution pensions are just savings pots essentially. You get tax relief when you put the money in, but pay tax when you take it out. You can either take the pot and buy an annuity which is an annual income for a certain period of time, use the drawdown method to take a certain amount a year but have access to more funds when you need them, or take a lump sum tax free. I think you can take it all if you want but there are tax implications there and therefore you'd need specialist advice there.
I'd probably merge the two defined contribution pensions just for ease but again, it's probably worth getting a bit of advice. That £30k+ could buy a property at retirement and provide a regular income etc.
I'm no expert - just had to learn a bit for work but I hope that helps somewhat
Reading PP I'm glad my fundamental understanding seems to be sound - thanks!
I agree pensions are ridiculously complicated. Like most financial products I suspect this is so it's hard to compare and difficult to know when you are getting a good/bad deal.
In addition, bastard governments keep moving the goalposts every ten seconds (in pension terms).
Thank you. Am trying to track down my initial final salary scheme. From memory, it was very good (17% non contributory), but I have moved house since working there and the firm is not being massively helpful about providing details of how to track them down.
Merging the Hargreaves Lansdowne and the Legal and General sounds sensible, but don't you need to have legal advice if you want to move more than £30k? It's literally about £100 more than £30k, irritatingly...
Thanks all for advice.
The "17% non-contributory" makes me smile. The final salary scheme I was in used to bang on about being "14% non-contributory". Since the pension you get is defined by the scheme rules the percentage is irrelevant - as long they are putting enough in, it doesn't matter if it's 300% or 5% - lots of employers took contributions holidays back in the day because schemes were awash with cash.
Fast forward to now and despite all the bluster about 14%, the scheme I am in is underfunded and relies on the company keeping it going - which is fine if they don't go bust.
It is scandalous that successive governments have been so lax in regulation and have changed the rules so often.
Yes, mine was RBS, so God only knows how it's doing now.
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