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Some people wonder if they are better-off managing their own pension. As financial planners, we believe pension planning is a specialist skill, much like a trade. If you are confident in doing your own plumbing and know what you are doing, for instance, then you might consider taking on certain home improvement jobs on your own. Similarly, if you are well-grounded in principles of investment strategy, know about cost mitigation (e.g. tax planning) and understand the market well, then certain qualified people may be able to construct – and maintain – a good DIY pension.
Where “DIY pensions” are tricky
The issue, however, is that UK pensions and pension rules are notoriously complex. To take an example, have you heard of the Money Purchase Annual Allowance (MPAA) rules, when they are triggered and how these affect how much you can contribute to a pension? Do you know the difference between a “crystallised” and “uncrystallised” pension when it comes to drawing an income? Without a clear understanding of these rules (and keeping track of them when changed by legislation), it would be easy to make a costly mistake with your pension planning.
Moreover, pensions are typically invested in assets such as stocks, bonds, property and cash. Each of these contain countless varieties which come with respective features, quirks, pros and cons (e.g. “junk” bonds versus gilts). Grasping even the majority of these, of course, takes years of study and experience – and even highly-qualified professionals like our financial advisers here at Cedar House are always learning! Even if one can attain a strong understanding of the types of opportunities within each asset class for your pension, it is then necessary to understand how they interrelate with one another to achieve appropriate diversification (to mitigate needless risk within your portfolio).
As you can see, this is a lot to ask of most people! Of course, there may be certain experienced, qualified people who can achieve all of this on their own, maintaining discipline in their pension over many years and decades. Yet they are relatively small in number. Most will benefit from at least some insight into their pension from a seasoned financial adviser.
What are DIY pensions?
Do-it-yourself pensions are sometimes equated to a specific type of pension; i.e. Self-Invested Personal Pensions (SIPPs). This is broadly true, although a DIY pension might also refer to a person who chooses to make important, complex pension decisions without guidance from a financial adviser. This might involve transferring your old workplace pensions into your current workplace pension, without carefully thinking through the repercussions. This may, of course, be a good idea for some people in certain situations. Yet if your current pension scheme offers limited investment options, involves high fees (which eat into your returns) and punitive exit charges, it may be a terrible idea.
SIPPs can be a powerful retirement planning tool, and may even be recommended by your financial adviser as part of your wider strategy. For instance, if you want a wider range of investment choices compared to the funds offered by a traditional personal pension scheme. Any savings or investments within a SIPP also benefit from protection from the taxman, with tax relief offered on your contributions. A basic rate taxpayer, for instance, gets 20% tax relief whilst a taxpayer on the higher rate receives 40% tax relief.
Types of SIPP
SIPPs broadly come into two types – “cheap” and “full”. The former allow you to get started with a relatively small amount (e.g. £5,000 to open the account – which may come from transferring another pension), and generally offer lower chargers because the SIPP company does not provide investment advice. However, your investment options may be more limited compared to a “full” SIPP. This latter type will give you a broader range of choices (e.g. commercial property and Open Ended investment Companies), but typically come with a higher price tag.
Both types are usually managed via an online portal (belonging to the investment platform), where you can log in to review your portfolio and make necessary changes. Be aware that, just like other defined contribution pensions, you cannot withdraw any money from your SIPP until you reach age 55 (set to rise to 57 in the future). Your SIPP can be passed on to beneficiaries as an inheritance – free from inheritance tax (IHT). Just bear in mind that they may need to pay income tax on any money they take from your SIPP, assuming you die after age 75. This could push them into a higher rate of income tax if both you and they are not careful. So it can be a good idea to seek financial advice to make sure your retirement plan is properly integrated into your estate plan to mitigate unnecessary costs.
Conclusion
DIY pensions can be a good option for a minority of retirement savers. Even confident people, however, will likely still benefit from financial advice to ensure no costly, irreversible mistakes are made which you may regret later.
Interested in discussing your financial plan with an experienced financial adviser? Get in touch today to discuss your financial plan with a member of our team here at Cedar House via a free, no-commitment consultation:
020 8366 4400 or enquiries@cedarhfs.co.uk