Demystifying Pensions

Carl Hobbins, Financial Adviser

The majority of people spend their whole working life allowing their employer to deduct income from their pay packet and in turn pay this money into a ‘default’ pension scheme, along with some employer contributions. The minimum employer contribution under current employment law is 3% of pensionable earnings, along with a minimum 5% from you, as the employee. This is fantastic, as at least 3% of your pension contributions aren’t even made by you. Some employers pay more into employees’ pension schemes and some even offer ‘matching contributions’ whereby the more the employee pays into their pension scheme, the more the employer will too.


People spend whole careers with the peace of mind that they have a ‘pension’. As a qualified Financial Adviser, I often ask friends, family members and clients alike, what type of pension do you have? Where are your pension monies invested? Who manages the pension fund? What’s your risk appetite when choosing your pension investments? Typically, and understandably, there are some blank faces to these questions with the usual response being “I’ve got several pensions. One from my employment with X company, then I moved to Y company and now I think I have a current pension with Z company”.


I also meet equally as many self-employed clients, many of whom have that typical entrepreneurial spirit that led them down the self-employed path in the first place. “I’ll just buy a buy-to-let property later down the line and use that income for my retirement”. “I’ll sell my business in the future”. “I can’t afford the contributions right now, so I’ll do it when I’m earning more”. These are the same types of clients I see later in life when often, none of this panned out. If those regular pension contributions had started many years earlier, they would have gone a long way by now.


A pension is a tax efficient wrapper. Think of a pension wrapper as a ‘vehicle’ to store your retirement savings in. But what sits under the bonnet of that vehicle is the underlying investment (the engine of the vehicle) that your cash is exchanged for each month/year. The underlying investment is pivotal in your retirement savings journey. It is very easy to obtain a pension, but it gets trickier when deciding where and how to invest the money within it. Have you ever received professional advice as to where your pension monies are invested and if it’s the most suitable strategy for your personal financial plan? Do you even have a financial plan?


When advising clients, I like to think of myself as a life planner. How can I effectively advise a client before understanding what’s important to them and their family and what their end goals are? I can then recommend a personalised financial plan for them, having established their attitude to financial risk, their capacity and need to take risk and the time horizon for their investment. Once we have a bespoke financial plan, we can then finally move onto the actual financial solutions that are most suitable for them. We need to understand your very individual circumstances and aspirations to be able to advise you properly.


I meet many clients later in their working life who approach me to ask, how much is enough in order for me to retire? How long will my money last? Will my money run out? Can I afford to retire early? I take the same view of pension planning as with anything else in life; always start with the end in mind. Getting solid financial advice earlier in your life puts you in the driving seat for the journey ahead, gives you peace of mind along the way and results in eventual financial independence.


Contact me today on 0121 323 2070 to discuss your financial future.