Pension Planning – What You Need to Know
Tuesday 25 March, 2025
Pension planning is an essential financial step in securing your future financial goals. It forms a crucial part of establishing the foundation for financial independence in retirement and contributes towards maintaining your desired lifestyle after your working years.
With a range of options and evolving regulations, navigating the complexities of pension planning can be daunting. This is where seeking guidance from a qualified financial adviser becomes valuable when choosing the right pension plan.
Recent Policy Updates
Staying informed about policy changes is crucial for effective pension planning. From April 2027, most unused pension funds and death benefits will be included within an individual’s estate for Inheritance Tax purposes, meaning pensions will no longer be entirely exempt from taxation (as they currently can be on death before 75). This change could impact the amount that can be passed on to beneficiaries.
To read in more detail about the impact of the changes to pension inheritance, read our article entitle Understanding Investments – Pension Taxes on Death.
The Normal Minimum Pension Age (NMPA) will increase from 55 to 57 in 2028. This means that individuals will have to wait longer before accessing their pensions without incurring tax penalties, except in cases of ill-health retirement or where their plan has a protected lower pension age.
Additionally, the UK government is modernising its pension system by expanding access to Collective Defined Contribution schemes, aimed at providing more flexibility and potentially greater returns for savers.
Understanding the Basics of Pensions
A pension is essentially a long-term savings plan designed to provide you with an income when you retire. In the UK, there are three main types of pensions.
The State Pension is provided by the government and is based on your National Insurance contributions, with eligibility and the amount received depending on your National Insurance record.
Workplace Pensions are set up by employers and typically involve both employer and employee contributions. These can be either defined contribution schemes, where income depends on contributions and investment performance, or defined benefit schemes, which provide a guaranteed income based on salary and length of service.
Private or Personal Pensions are those set up independently, with contributions made by individuals and invested on their behalf.
Determining Your Retirement Needs
The first step in pension planning is to assess how much money will be needed to maintain your lifestyle in retirement. Factors such as current living expenses, expected future costs, and the longevity of your pension must be considered.
Many experts suggest aiming for around two-thirds of your current income, although personal circumstances and aspirations can influence this. By calculating your desired retirement income, you can set a realistic savings target.
The Importance of Starting Early
Time plays a critical role in pension planning. The earlier you begin saving, the longer your investments have the potential to grow. Even small contributions made early in your career can benefit from compound interest, helping your pension pot grow substantially over time.
However, even if retirement is approaching, strategies can be implemented to maximise savings and improve financial positioning. Regularly reviewing pension arrangements and adjusting contributions as needed is key to staying on track.
Read our article on Why Cash Flow Modelling may be the Key to Achieving Your Dreams.
Choosing the Right Pension Plan
With numerous pension products available, selecting the right one can be overwhelming. A professional financial adviser can help navigate the options.
Fees and charges vary between pension plans, and it is important to understand these costs, as they can affect the value of savings over time. Investment strategies also differ, with pensions typically invested in assets such as shares, bonds, and property.
Attitudes towards pension investments can also differ. Younger individuals may opt for higher-risk strategies, while those nearing retirement may prefer more conservative approaches.
Flexibility is another key factor, as some pensions offer greater control over how and when funds can be accessed, particularly following the pension freedoms introduced in 2015.
How a Financial Adviser Can Help
A qualified financial adviser can play a vital role in guiding individuals through the pension planning process. Personalised advice ensures recommendations are tailored to specific circumstances, taking into account income, assets, liabilities, and retirement goals.
Pension contributions in the UK attract tax relief, and an adviser can help maximise these benefits while avoiding potential pitfalls such as exceeding the annual allowance, lump sum allowance or lump sum and death benefit allowance, which could result in tax charges.
Investment management is another area where expert guidance can be beneficial. Pensions are invested across a range of assets, and an adviser can help create an investment strategy aligned with risk tolerance and retirement timelines. Regular reviews of pension performance are also essential, ensuring adjustments can be made in response to changes in market conditions or personal circumstances.
Since pension reforms in 2015, individuals have greater flexibility in accessing their pension savings. Options include taking lump sums, buying an annuity, or using income drawdown. A financial adviser can help navigate these choices, ensuring decisions align with financial goals while minimising tax implications.
Planning for Other Retirement Income
Pensions are just one aspect of retirement planning. Other sources of income, such as savings, investments, rental income, or inheritances, should also be considered. A financial adviser can help create a comprehensive strategy that integrates multiple income streams, strengthening financial security in retirement.
Choosing a Reputable Financial Adviser
When selecting a financial adviser, it is essential to ensure they are fully qualified and regulated by the Financial Conduct Authority (FCA).
Advisers with certifications such as Chartered Financial Planner or Certified Financial Planner (CFP) have undergone rigorous training and have the expertise to offer sound financial advice. An FCA-regulated adviser is also obliged to act in the client’s best interests, providing protection and peace of mind.
Jacob West, Independent Financial Adviser (IFA) based in St Albans, Hertfordshire, summarised:
“Pension planning is essential for securing your financial future, but it can be complex. By starting early, regularly reviewing your pension, and seeking guidance from a qualified financial adviser, you can make informed decisions that align with your financial goals and provide peace of mind in retirement. A well-structured pension plan supports your ability to enjoy your retirement years without financial worry, and professional advice can help you navigate the intricacies with confidence.”
Please note: This article is for information only and does not constitute individual financial advice. The Financial Conduct Authority does not regulate tax planning, estate planning or cash flow modelling. The value of your investments can go down as well as up, so you could get back less than you invested. Past performance is not a reliable indicator of future performance. The information contained within this article is based on our understanding of legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases, and reliefs from taxation may be subject to change. A pension is a long-term investment not normally accessible until age 55 (57 from April 2028). The value of your investments (and any income from them) can go down as well as up which would have an impact on the level of pension benefits available. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change.
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