Taking pension money early: finding the perfect home for your investment

Being able to withdraw savings from your pension at 55 can be a very welcome benefit. It can introduce a whole new resource into your available finances. But it should be handled with caution – your hard-earned savings were originally meant to support you in your retirement years, and they still should.

“So, it is vitally important to ensure that if you do take money from you pension pot there will be sufficient investment left to support you in later years.”

Releasing pension money early is not right for everyone as it will leave you worse off in retirement.

So, ok, you are going to withdraw your pension and your total focus is on the money you will withdraw. But what will happen to the money that remains? What factors do you need to be aware of for a great investment?

Access and continued investment

When taking money from your pension it is just as much about what will be left to be invested as the cash you will withdraw. As we all know, the pension world can be complex – so the professional eye of a financial expert who can guide you through your options is essential. Here at Pension Access we look at the whole package. When you want to withdraw money from your pension fund one of our financial advisers can walk you through risks, benefits and future investment. As with all investments, your capital is as risk.

Different pension types and schemes offer specific benefits – so let’s start by looking at how your pension pot will be dealt with in various circumstances.

What does your pension fund look like now?

Private pension
It is recommended that you actively monitor the growth of your pension. Most private pension providers will send a regular review of how your pension is performing. If you have a good knowledge of the pension world and the current market – then great. If performance is not clear you can always get in contact with the provider to give you an up-to-date valuation. It’s important to remember that past performance is not a reliable indicator of future results.

“Within the pension check there should be a benchmark figure, so you can see how your investments have performed against an industry average.”

The fund will either be under performing or outperforming. A yearly review can be very useful. If the fund is constantly underperforming then this may be the time to look at other providers, but it is important to get advice about this. Apart from the fact that you do not want to solely change because of short-term issues, you also need to take into account other factors such as unique scheme benefits and lower charges (see below).

Work pension
A work pension comes with the added bonus of your employer’s contributions, which can make a big difference to the size of your pot. In most cases it makes no sense to transfer out of an active workplace scheme because of these contributions. However, it is well worth checking how your workplace pension is invested because some schemes allow you to choose how your savings are invested based on your attitude to investment risk and years to retirement.

Benefits and charges to look out for

Lower charges
Your pension provider manages how your money will be invested and so, as may be expected, this comes with a charge. These charges differ from provider to provider and tend to range between 0.5% and 1.5% a year (percentage of your total pension pot)¹.

1% may seem like a tiny amount and hardly worth the worry and the hassle but don’t forget this charge will be taken from your fund every year until you retire. This could make a real difference in the size of the pension you receive at the end of your working life.

Pension Access has a thorough knowledge of how charges work and which pension providers are going to hit you harder than others. Of course, the charges should not be taken alone – they should be considered along with other benefits and the likely performance of the fund.

Improved performance
When you contribute to a pension, the provider invests the money for you with the aim of growing it as much as possible. To an extent you can determine how your money is invested by stating whether you want it to be high, medium or low risk. As expected, high risk investments are more likely to pay out a greater amount – though they are more volatile.

“As much as you could gain more you also run a greater risk of losing out. So, you should be aiming for an investment portfolio that balances risk and reward based on your specific circumstances.”

Whichever type of investment you decide to go with, you need to regularly keep an eye on performance. Just bear in mind that past performance is not a reliable indicator of future results. Yet, a regulated financial adviser will have spent years studying and training and is therefore in a great position to make an informed decision as to which investments suit your needs and aspirations.

How long will the fund be invested?

This is another important consideration. In order to determine what your final return will be you need to know how much longer the money will be invested. The longer your pension pot is invested, the more likely it is to make a bigger return.

Fund management

A financial adviser will explain how your fund will be managed. At Pension Access we tailor our pension portfolios to our client’s plans and attitude to investment risk.

Conclusion

There are many factors which will determine the progress and performance of your investment: your contributions (is there a need to revisit this monthly figure?); the length of time it will be invested; risk of investments and how this is managed; the charges incurred by the pension provider and the flexibility (i.e. around transferring funds etc) of your pension pot.

By keeping a close eye on your pension throughout your career, you have a much better chance of sorting things out when things go a little awry. A Pension Access financial adviser, with access to the current financial market and a wide network of providers, can support you in attempts to maximise your pension fund. A regulated financial adviser can not only take away the hassle of streamlining your pot, he/she can also offer advice as your pot matures – with a good knowledge of your needs and financial situation.

¹Figures stated by Pension Access.

Taking pension money early is not right for everyone as it will leave you worse off in retirement. Also, tax treatment depends on your circumstances and is subject to change. That’s why it makes sense to get help from a regulated specialist.