Despite the FTSE100 hitting record highs recently, many UK pensioners and soon-to-be pensioners have seen their pension capital shrink drastically. Why? Many workplace pension funds were locked into government bonds that lost value due to Lizz Truss’s bond debacle and the BOE raising interest rates. Some pension pots shrank by almost 40%.
Generally, pension funds change their investment strategy to lower-risk assets during the few years leading up to retirement to preserve pension capital. This means investing more in bonds. When interest rates rise, bond values decrease. UK interest rates have gone from 0.1% to around 5.25% in as little as 15 months.
This unfortunate event has left many pensioners fearful their capital will not see them through their later retirement years. Many are now relying on their government pension to supplement the shortfall, leaving them with no option but to rethink their retirement plans, income drawdown during retirement, tighten their belts, and cut down on luxury and lifestyle. Professionals a year or two away from retirement are even considering delaying their retirement to build a bit more money in their pension pot.
Professionals and pensioners have had to rethink their retirement lifestyle and make adjustments. Nothing is worse than planning your whole life for a financially secure retirement to live the lifestyle you imagined and then having to make sacrifices.
Now more than ever, the private pension has grown in importance. With company pensions not what they used to be and government pensions in the balance, a personal or self-invested pension plan is the new norm to supplement retirement savings.
A private pension is the one consistent retirement savings plan not affected by changing jobs. You can contribute to it even if you are unemployed. Also, with professionals changing jobs an average of seven times in their working life and even more with younger generations, a professional would theoretically end up with seven smaller pensions that would not have time to grow in value.
Benefits of a Private Pension and a Self Invested Pension Plan (SIPP – UK)
- You decide contribution time length – Private pension contributions can be started when entering the job market and grow till retirement, a good 40-odd years later.
- Tax advantages – There are tax advantages to some private retirement savings plans especially contributing regularly towards a SIPP with relevant UK income.
- You choose the investment – It allows you to select the type of investments according to your risk appetite and timeframe till retirement.
- Transfer your workplace pension – Most company pensions are invested in generic funds that don’t always perform well. With a SIPP, you can transfer UK workplace pensions into one place and control where your money is invested.
- Flexible – You can choose from a wide variety of funds according to your retirement saving needs. Your financial advisor can help determine the suitable investments for your savings needs and ensure they are actively managed.
- Charges or fees are lower – Fees tend to be lower or very reasonable, allowing you to save more.
What can be done to help bolster retirement savings?
- Consolidating pensions – Transferring workplace pensions into one could help boost savings and allow you to select the funds invested and ensure they are actively managed.
- Tax savings – Certain tax-efficient solutions could help mitigate taxation of your retirement savings and leave more money in your pocket. A financial advisor can help you find the right tax-efficient solutions for your financial situation.
- Increase pension contributions – Pay higher contributions to workplace pensions. Some companies will even match your current contributions. There is usually a limit to the amount that can be contributed. Find out, try to contribute the maximum, and receive the matching company contribution.
- Start a private pension plan.
Your financial advisor can help you choose the right retirement savings solution that fits your retirement and current financial goals.
Please note, the above is for educational purposes only and does not constitute advice. You should always contact your deVere advisor for a personal consultation.
* No liability can be accepted for any actions taken or refrained from being taken, as a result of reading the above.