Generally speaking, in the past, an individual would work for one company throughout their working life and then retire using the benefits of one pension alone. This would likely have been a Defined Benefit (known as a Final Salary) scheme which provides a guaranteed income for life, this is likely to be escalating with a level of spouses’ benefit included. In addition, it is likely the individual would not have had to of contributed to this scheme, it would have been funded by the employer.
Whilst individual financial planning was still important, these individuals had the comfort of knowing they already had some guaranteed income in their retirement.
Nowadays things are very different. It is now more common for an individual to work for a number of different companies in their working lives. Whilst some organisations still offer Final Salary schemes, these are fairly rare and individuals will more likely be enrolled to a Group Personal Pension, with the added likelihood they will need to make a monthly contribution together with their employer. Individuals usually end up at retirement with several different pension schemes from multiple employers.
Due to the various pensions individuals now have, it can be very confusing as to how the benefits are to be taken. Some plans offer Guaranteed Annuity Rates, others have guaranteed growth rates with some offering a Guaranteed Minimum Pension. There is also the consideration of whether spouses benefits are included, whether the pension income escalates and whether tax free cash is available and is to be taken. If a decision has been taken to annuitise the benefits, it is also important to consider whether a better annuity rate can be achieved elsewhere.
More recent pensions do not generally include the above guarantees but it is still important to consider in what form income is taken and whether this is sustainable.
Traditionally, the pension was used to provide the income with any savings and investments being used to top up income or pass on as an inheritance to the children. Due to changes in legislation this has ‘been turned on its head’ with the pension now being the fund of ‘last resort’ due to the fantastic inheritance tax planning opportunities it offers.
In summary, taking pension benefits can appear to be confusing but seeking the help of an independent financial adviser will help provide clarity and provide you with advice tailored to you and your circumstances.
At Wingate, we specialise in helping clients plan for retirement and provide advice on how these pension benefits alongside any investments should be drawn. Using our technical expertise, together with our cash flow planning service, we can model different scenarios to ensure benefits are drawn in the right way. If you would like to discuss your retirement options, please contact me and I will be happy to discuss our financial planning service.
