Most people today have some sort of a pension, but how many know exactly how they should manage it? Our friends at Seven Investment Management (7IM) recently released an article highlighting seven easy mistakes clients can make with their pension.
- Saving too little
- Saving too much
- Not taking the right amount of risk
- Beware the scammers
- Taking all your tax free lump sum without a plan
- Not collating your pension pots
- Not getting advice
Below we have picked our top three mistakes for clients to look out for, you can also access the full article here.
» Saving too little
While most people have started a pension, they’re unfortunately probably not putting in enough money. The old rule used to be to take your age, halve it, make that number a percentage of your salary, and save that amount. However, with people buying their first homes and having families later in life, this level may (for many) be far too much for their finances and potentially mean they put in the bare minimum if anything at all.
So 7IM are suggesting that clients use the rough ‘25x pensions rule’ of thumb. This is where they take the annual income they think they’ll need once retired and multiply it by 25 to gauge very roughly how much they might need to save. Clients can check how far they’re off their target by taking what‘s been saved so far and divide by 25 to see the level of income that they might expect in retirement. And if there’s a big gap between the end sum and expectations, at least you can have the conversation with them now rather than when it’s too late.
» Not taking the right amount of risk
When your clients first come to you to begin to invest, they need to complete a risk profiling questionnaire. If at the end of the profiling, they are deemd to be a moderately cautious investor, you’d explain what that means and tailor their investment accordingly.
However, if they tend to spend more than they possibly should, your client could run another risk i.e. that they run out of money before they die. While lots of people don’t believe in passing on their wealth and want to spend it all themselves, we can probably assume that no one wants to die having run out of money some years before…
7IM instead believes that once the risk tolerance and capacity for loss has been determined and you’ve had that conversation about their broad goals, you can flag if there’s a negative difference between how much your clients hopefully see from their investments and how much they might generally want. You can then have the conversation with them that they’ll either have to save more, work for longer or take more risk.
7IM stresses that the team is not advocating that everyone should maximise their level of investment risk – not least as it is a very personal subject – but if clients can have that conversation about their options with you as their financial adviser now rather than in 25 years’ time you can help them plan for a better future.
» Not getting advice
Many advisers are now reviewing the way they charge for their services. So clients can pay a percentage of their assets or a one-off fee.
7IM has always advocated that people have a financial plan and get one done professionally. And research backs up their view. The UK’s International Longevity Centre determined that those who sought advice between 2012 and 2014 ended up with more assets (£13,435) and higher pension pots (£27,664) than those of similar financial circumstances who did not get advice. And there are other such studies that point out that its false economy to believe that people are saving money by not seeking advice.
We all appreciate that pensions and our long term savings are too important to take the wrong tack. And the same view is taken here at DISCUS: we believe when it comes to clients facing their pension, assistance from a financial adviser is essential.