Understanding your pension

I came across an example of an experience that most financial planners have from time to time. An adviser took on a new client. The clients believed that they had about, (let’s call it X) in their pensions, it surprised them and their adviser to learn that in fact they were worth considerably more (X + about £300,000).

The way the story was framed within the financial pages suggested that the adviser had created a huge return, in fact this was nothing to do with the adviser and rather missing the point. The point being that many people simply do not know what their pensions are worth. I do not believe that this is because of a lack of intelligence, but rather the very confusing statements issued by most pension companies.

Have a look at your pension statement, does it actually tell you what your pension (or investment) is actually worth? There’s the rub, sometimes admitting not understanding something because we are told “it’s rather obvious” is a very difficult admission. Yet I cannot emphasise enough that there are no stupid questions when it comes to your money. Any adviser that dismisses your question as “stupid” should be dismissed. His or her job is to sufficiently explain what you have, what it does, what it’s worth and why you’ve got it. If you don’t know, change your adviser.

There is no stupid question

Sadly it would appear that even senior economists that advise the Bank of England fail to understand their pensions – dare I suggest that such a statement may also be true of those that determine pension laws and tax rates.

In essence the concept of pensions is basic. Here it is. You save over time to enable you to live off the proceeds when you retire.  There are really two types of pension. One that is purely investment, so the size of the pot fluctuates daily, what you get is what you get. The other is a final salary pension – based on how long you worked for your employer and what your final salary was – you get a percentage of your final salary for life, with inflation. This type are now the equivalent of “gold dust”.

There are of course complexities, all of which were dreamed up by meddlesome politicians and their advisers to either encourage or discourage certain behaviours so that they could give the appearance of actually reflecting their stated manifesto values and aims. The UK pension system is particularly complex, the principles are not. To make matters worse, the jargon used has been made up by parties with vested interests (including financial advisers).

So help me to help you… to understand what you have so that you have a basis on which to make some sensible decisions. Do not leave it to the political elite.

Dominic Thomas
Solomons IFA

You can read more articles about Pensions, Wealth Management, Retirement, Investments, Financial Planning and Estate Planning on my blog which gets updated every week. If you would like to talk to me about your personal wealth planning and how we can make you stay wealthier for longer then please get in touch by calling 08000 736 273 or email info@solomonsifa.co.uk