Why you may need a financial advisor for your pension

For most of us it’s likely our retirement could span in excess of 30 years. You’re faced with having to manage and invest a large pot of money that you can’t afford to lose. You need to take enough out to live on without taking too much and running out. But you don’t know how long you need the money to last – this is where a financial advisor can help.

Even for the most experienced of investors, a pension is likely the largest investment they’ll have ever made, and almost certainly the longest term. 

There are a number of times when you may decide to employ the services of a financial advisor to help you with your pension:

  • When you plan to use flexi-access drawdown
  • You want to understand how to access your cash tax-efficiently
  • To reduce investment risk
  • To find the best annuity deal
  • You plan to leave a financial legacy
  • If you want to consolidate multiple pension pots to make things easier to manage
  • When you’re looking to retire
  • If you’re inexperienced at investing large sums of money
  • You want to maximise returns on your money

Many people get financial advice from their friends, family and co-workers, which can be incredibly risky. Quite often their opinions will be based on their own past experience, or on advice that was given to them. Even if the advice they received was right for them, it doesn’t mean that it will be right for you. In the worst cases, this advice could leave you financially worse off for the rest of your retirement.

If you’re managing your money over the long-term, you have to protect yourself from the effects of inflation. As inflation increases – the value of your money can go down. You might not notice the odd 1 or 2% now, but compounded over a 30 year retirement your pension pot could be worth a lot less than you thought and your lifestyle could suffer because of it.

Protecting your money from inflation is just one thing a financial adviser can do for you. They can also help you understand how much you can afford to take from your pension without depleting your pension pot too early. They can also advise on the most suitable investments that suit your appetite for risk.

Managing Investment Risk

Not all investments carry the same level of risk. There’s an inverse relationship between potential returns and the amount of risk you take. It’s a careful balancing act to maximise your returns, whilst minimising your exposure to risk.

A financial adviser will ask you to complete a risk questionnaire. This tells them how much risk you are comfortable with.

They then invest your money according to how much risk you are comfortable taking. Investments change over time, so what is seen as low-risk one year, may become much higher risk at other times. It’s important to balance your portfolio regularly to allow for this. At 2020 Financial we rebalance our client’s portfolios quarterly so that they are never over-exposed to risk.

Diversifying your investments

A common mistake by self-investors is investing in too narrow a choice of investments and not spreading the risk across different investments, known as diversification.

Proper diversification is not just investing in different companies, ideally you should choose different companies in different industries that tend to have an inverse relationship. This means if one falls, the other tends to rise. 

Financial Advisers will look to invest in both developed and emerging markets and provide a wide mix of investments to spread your risk.

Managing your money tax efficiently

If you have a defined contribution pension you can access it flexibly from the age of 55. You also have access to 25% of your pension pot as tax-free cash. A financial adviser can help you access your money in the most tax-efficient way, saving you money. 

If you plan to take your pension whilst still working, it’s important that you consider the tax implications of doing so. It’s a careful balancing act that your financial adviser can help you navigate. 

A good financial adviser may also challenge your way of thinking: 

Our client had already taken their tax-free cash from their pension at 55 but wanted to flexibly access money from their pension whilst they were still working to purchase a car.

The money from their pension would have taken them over the higher rate tax threshold, so they would have paid 40% tax on anything they took from their pension.

We discussed other options available to them like an interest free loan arrangement or an interest-free credit card, since they could more than afford the repayments whilst they were working and the balance would be paid off before they planned to retire.

By opting for one of the alternative options we discussed with them, they saved the 40% tax they would have paid on drawing money from their pension and they kept the money invested for the future.

Managing legacy and estate planning

The number of people who will likely be liable for inheritance tax has risen in recent years as UK house prices have gone up. Those in the know are taking advantage of a loophole in the system that allows money to be passed on to loved ones through their pension. 

Private pensions offer a legitimate way of passing on wealth free of inheritance tax. Depending on your age when you die, your beneficiary might receive the money free of income tax as well.

For those managing their pension with estate planning in mind, it pays to have a financial adviser to help them navigate the complex rules and planning.

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