Time for a fresh look

Many of us make New Year’s resolutions with the best intentions only to find they fall by the wayside after a few weeks. But if there’s one resolution worth making and sticking to, it’s taking a fresh look at your finances to ensure everything’s in order for the coming year. From my experience, when my clients get around to doing this some are pleasantly surprised to discover they have more money than they thought, meaning they can adjust their plans accordingly. Throughout January I’ll be examining what might need attention on how you can fix it, starting with pensions. I frequently come across people with four or five pension pots collected over their working lifetime but because the individual sums are not huge the annual statements are often thrown in a draw without a second thought. Yet if the pots were amalgamated into one lump sum, many people would sit up and take a lot more notice about what they’ve got and how it’s being invested. I recently spoke to a prospective client who had multiple pension plans – two from her current employer, two from previous employers, a personal pension she’d set up some years ago and another personal pension where she’d been encouraged to contract out of the State Earnings-Related Pension Scheme (SERPS). She was concerned about being able to afford to retire in 10 years, at the age of 65. What we were quickly able to show her was that the wealth she’d accumulated in those pensions together with the money in her ISAs and a General Investment Account (GIA) was going to be enough for her to be able to retire at the age of 60 instead. Another issue this lady had was that she’d been encouraged to transfer out of the State EarningsRelated Pension Scheme (SERPS) and she was concerned this had been mis-sold to her and that she’d end up with very little State Pension and a personal pension pot that had very little value to it. But what we were able to show her was that she was eligible for a full basic State Pension and that the pension pot was worth far more than she thought so in the end that should compensate her for the fact that she was contracted out of SERPS. She also wanted to take her 25% tax free cash and use drawdown for the rest of the pots rather than buy an annuity because she’d heard so many bad things about them. But it was clear that based on the types of contracts she had drawdown was unlikely to be available with some of them and it would make sense to consolidate these into a completely new pot that delivered the flexibility she needed. This type of scenario is extremely commonplace as a result of people changing jobs and employers far more frequently than they used to. I once came across a client who had 37 policies – imagine that! This was an extreme case, but I think it hammers home the point that it’s very difficult for some people to comprehend how much money they’ve got when it’s all spread around in various different places. When it comes to consolidating your wealth there are several advantages, the first being that it brings simplicity and transparency so you can see what you’ve got in one place. You can then adopt a common investment strategy and risk profile across the entire pot rather than having potentially several different risk profiles. You can also introduce all the features you’d need from a pensions freedoms point of view. Another advantage is that in many cases consolidation also allows you to reduce the overall charges you’re paying. It pays to be aware of the potential drawbacks of consolidation as well. You’ve got to consider whether your existing pensions have got exit penalties, the cost of the advice you’re being given and the fact that some of your pensions may have built in guarantees which would be lost if they were transferred. So it’s really important for somebody to take advice before making changes rather than just trying to plough on and do it themselves. Next week we’ll look at how to tackle the multiple investment pots you’ve collected. TIM EMBLETON Got a financial question you want Tim to answer? You can email him at tim@tfp.limited A PENSION IS A LONG TERM INVESTMENT. THE FUND VALUE MAY FLUCTUATE AND CAN GO DOWN. YOUR EVENTUAL INCOME MAY DEPEND UPON THE SIZE OF THE FUND AT RETIREMENT, FUTURE INTERESTS AND TAX LEGISLATION Time Financial Planning Limited is an appointed representative of The Whitechurch Network Limited which is authorised and regulated by the Financial Conduct Authority.