What is a pension anyway and who really cares?

I often hear people moan about pensions being poor investments. They might say something like, “the returns have been so dreadful I would have been better investing in an ISA, buy-to-let property or even sticking cash under the mattress”. This thinking is flawed as it confuses the tax treatment of pensions with the actual investments inside them. They are two completely different things.

Another common complaint is “I took out a pension in nineteen canteen and have been saving £50pm ever since but I am only going to receive a pension of thrupence ha’penny  a year when I retire”. This line of thinking also completely misses the point.

Pensions aren’t actually an investment at all. Plenty of people languishing in poor performing pension funds would probably agree with that statement albeit for a different reason!  A pension is nothing more than a tax efficient means of holding investments. Pensions are the bag not its contents.

The real question we need to answer is simply “how much do you need to save for your retirement?”

Don’t know?

I’m not surprised.

This is hardly surprising as traditional financial advice focuses entirely on the sale of financial products and doesn’t even begin to attempt to deal with the really important issues. If lifestyle is mentioned at all it is often a glib promise of retiring to a Caribbean Island or a one off event like “a fantastic world cruise” which may have no relevance to your own ambitions. This type of discussion is typically used as means of motivating people to buy a product. Unfortunately, this is part of the problem – advisers are selling dreams when they should be managing expectations.

When I first meet a new client they are very often confused too. They know they have a big bag of paperwork about a range of financial products which they have accumulated over the years. These were often bought from an adviser selling this season’s hot product or the junk that is being offloaded to clear the shelves for next season. Unfortunately, they have no idea how these work together or how far they will go towards providing a comfortable lifestyle in retirement. It is as if they have been on a shopping spree in the Xmas sales and have bought a bag full of “bargains” which they probably don’t want or need. This tends to happen when we go shopping without a clear shopping list.

The question “how much do you need to save for your retirement?” can only be answered after you have identified what you actually want your retirement to look like.

  • When will it happen?
  • Will it be a single major life changing event or a gradual transition?
  • Will you stop working completely or change your working life – perhaps starting a new job or a business fulfilling a lifelong passion?
  • Where will you live?
  • What will you do?
  • Who will you do it with?
  • How much will it cost?
  • How much risk are you prepared to take to achieve your goals?
  • How much risk do you need to take to have a reasonable chance of achieving sufficient growth to achieve your goals?
  • How much risk can you afford to take? – often a very different answer!

Once you can answer these questions clearly – and only once you can answer them clearly – should you even start discussing whether a pension is an appropriate tax wrapper; let alone what actual investments should go in the “bag”.

The problem is, most people have never even thought about these questions. Even those that have, often struggle to articulate the answers clearly to themselves never mind a Financial Planner who is going to help them create a suitable strategy to provide the peace of mind they need.

The issue isn’t whether pensions are good or bad investments, but rather what service do you really need from your advisers?

A good financial planner should be a coach who holds you accountable to the agreed strategy. Someone you can trust and open up to. Perhaps a voice of reason when you have crazy ideas  that, deep down, even you know will end in tears (it’s OK we all have them) but just need someone else to confirm it so that we can move on.

We find that once clients experience a genuine financial planning service they stop thinking in terms of financial products and start thinking about achieving and maintaining their own personal vision of their desired lifestyle. Clearly pensions are one of many products which could be used but it is unlikely that a pension will be the solution in isolation. You may also choose to use bank deposits, ISAs, share portfolios, collective investments (Unit Trusts/OEICS/ETFs/Investment Trusts), investment bonds (onshore or offshore), property, equity release, etc. The options are almost limitless once the Financial Plan is in place but remember a Financial Plan is for life not just for Financial Planning Week.

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