Make sure your nest egg doesn’t go bad

We probably all recognise the scenario that faces us every day of our lives: we are busy tackling the pressures of modern life and forget to plan ahead.

Insurance brokers are no different: they concentrate so hard on doing the best for their clients that they may neglect their own financial affairs. But this can have very serious consequences for their finances, especially when it comes to their pension provision.

Some financial advisers have seen cases of small business owners or self-employed people facing an 80% cut in their income on retirement.

Many brokers see their business as a nest egg that they can sell to provide the income they need in retirement. This can be a dangerous strategy, as it relies on the assumption that there will be a buyer for the business at the price they are looking for when they come to sell.

Other brokers may have set up a pension plan many years ago that they are paying into each month, and believe their pension provision is sorted. As pensions have changed and developed in recent years, brokers in this category are probably missing out on much better deals that are now available.

The new Pensions Bill unveiled in January confirms the rise in the age of retirement for men, but more significantly, it accelerates the increase in pension age for women to 65 by 2018 and to 66 two years later. It means that female brokers will need to review their provision because they will have to wait longer for their pensions.

Also, under the provisions of the bill, companies will have to enrol employees into a pension scheme from 2012.

Facts & Figures: Chartered Financial Planners managing director Simon Webster told Insurance Times: “The biggest single issue is that self-employed people are totally focused on their business, as well as trying to achieve some kind of family life.”

He says it is vital that brokers see a financial adviser at least once a year to consider their future finances carefully, and certainly not rely on being able to sell the business at 65.

The brokerage sector has seen some consolidation and there are opportunities for small brokers to get a price for their business, but there are no guarantees, Webster says.

Whittaker Financial Solutions managing director Eden Whittaker agrees that it is high risk to plan for retirement based on the value of a business. “If you concentrate on one factor and think that your business is worth hundreds of thousands, you could end up waiting for someone to give you that money,” he says.

Brokers must put their trust in financial advisers and allow them to invest their money in diverse ways. “You have to stop talking just about pensions and talk instead about creating retirement wealth,” Whittaker says.

He says many brokers witnessed the “disgusting” amounts of money made by financial advisers in the 1980s and ’90s, and have been prejudiced against them ever since.

“Many brokers distrust financial advisers and their attitudes have become entrenched. These entrenched views have to be overcome,” he says.

John Bedford, an insurance broker with Willis & Company (Insurance Brokers) Ltd, where he is a director, is a member of the company-sponsored group scheme, but he also reviewed various old legacy pensions from previous employers and established a self-invested personal pension (SIPP) to hold most of these funds.

“While it would be great to have just one consolidated scheme, I benefit from the investment flexibility of a SIPP, and it is not so bad having funds in just two places when I am attempting to make plans for the future based on the projected pensions likely to be available from the schemes,” he says.

Willis had an old legacy group scheme and a redundant stakeholder scheme, so it moved to a new web-supported scheme (offered by Aegon Scottish Equitable), and all staff are offered a pension contribution after they have completed a probationary service period, whether or not they are able to contribute themselves.

Alpha Financial Services advising partner Tim Fellows warns that brokers could face an 80% cut in their income on retirement if they get things wrong.

Some people believe that they have a pension plan with a big provider and that it must be okay but, he says, it depends on what type of plan it is.

Fellows compares pension planning to owning a car, and argues that a 20-year-old car will probably not be economical or efficient, and needs servicing regularly. The same goes for retirement planning: he says that regular “re-pension” reviews are crucial. IT

The Pensions Bill key points

• The bill raises the state pension age for women to 65 by 2018 and to 66 by 2020. For men, the retirement age will also increase to 66 by 2020.
• Companies will have to enrol all employees earning above £7,500 into a pension scheme from 2012, and contribute at least 3% of employees’ salaries.
• Employees’ contribution into company schemes should be 5%, including tax relief.

Make your pension go further

1. Review your pension regularly to make sure you are on course for a comfortable retirement – you can use a pension calculator to do this. As you go along you may need to top up your pension or change funds if your investments are consistently under-performing.

2. If your employer offers a pension contribution, take it. Not doing so is turning down free money.

3. Consider consolidating pensions in one place – it makes them easier to manage. If you are happy to make your own investment decisions, a SIPP offers a wide range of investments and online access to your pension so you can monitor it as often as you want. Be careful if transferring that you aren’t giving up any valuable guarantees.

4. Beware of high charges. You can now invest in a pension at a much lower cost than was previously possible. However, many people still have older pension contracts that were set up in the 1980s and 1990s. It would not be unusual for an older pension contract to take a fixed monthly fee or a percentage of your monthly contributions as a charge before investing them. The investments themselves could then carry a percentage charge as well. On top of that you might be paying an annual management fee. Happily things have changed, and you can now set up a pension without paying any initial charge.

5. Shop around for an annuity – it could seriously improve the retirement income you receive.

6. Consider making contributions for a spouse to make use of both of your personal tax-free allowances in retirement; you might still want to be selfish with contributions, however, if you are a higher rate taxpayer and they are not.

Information provided by Laith Khalaf, pensions analyst, Hargreaves Lansdown.