The dramatic fall in share prices has raised concerns by poultry managers and workers about pension provision. Independent financial adviser John King offers some pointers

The two current problems with planning for your retirement are how does the current economic downturn affect pensions and how do you work out which options are suitable to you?

Recent problems in the financial sector, particularly the stockmarket, make miserable reading. Anyone reading a pension valuation today is likely to have seen their fund reduce over the past year. For those approaching retirement, it is a real issue. If you buy an annuity, you crystallise your fund value and lock into lower annuity payments for life.

For this reason, unsecured pension (USP) has gained popularity recently – if the markets recover, at least your fund has the potential to rise with them.

Another option may be to retire in stages. Because you do not have to stop working to take your pension, it may be possible to start taking benefits from part of your pension while reducing hours worked. This solves the problem of committing your entire pension to an annuity while your fund is down.

Taking a USP or phased retirement option can be complicated and confusing it is important that you seek independent financial advice to ensure you are fully aware of the risks.

If you are close to retirement, it can still be worth making a pension contribution. Remember, you will get tax relief when you pay in and tax-free cash when you retire. A higher-rate taxpayer would pay £80 to get £100 invested, would get £20 in extra tax relief and have £25 in tax-free cash. The net cost to them is, therefore, £35. The fund left invested to pay benefits would be £75. Even without any investment growth, their overall net contribution would be worth more than double in the fund.

For those a few years off retirement, however, recent stockmarket falls have created a great opportunity. You can now buy more units for the same amount of money. Provided the markets do recover, those units will increase in value.

Those investors who continued buying shares in the stockmarket slump of 1987 or the recession of the early 1990s benefited hugely when the markets returned to normality. For this reason, now is a particularly good time to investigate starting or increasing payments to a pension.

So, how do you make the best of current market conditions? The government would like to think we will all research the options available and select a pension ideal for our needs. The truth is that good advice is more valuable now than at any time in the past 25 years.

An independent financial adviser (IFA) will have experience of how all the options can be tailored to an individual’s circumstances and ensure that investments chosen are appropriate to a client’s attitude to risk.

As an example, most people do not take advice when they get to retirement. As a result, they set up their annuity with the same company that held their pension. Most are blissfully unaware that they could get higher levels of income simply by obtaining advice on the best annuity providers from an independent financial adviser.

Equally, an independent adviser will help set up a self invested personal pension (SIPP) if it is appropriate. This could allow the SIPP to own property – if you work from the property, then you would pay rent to the pension, increasing its value when you come to retirement. Also, capital gains tax is not payable on assets held by a pension, so when the property is sold, you could save a considerable tax bill.

This article is for information purposes only and you should seek independent financial advice from a suitably qualified adviser.

Glossary
Stakeholder – Simplified form of personal pension with a limited range of available funds which is capped. Stakeholders may have a reduced fund choice.
Personal pensions – Similar to stakeholder but usually with a greater range of funds to choose from. Charges may vary from company to company and from fund to fund and are not capped by legislation.
Self invested personal pensions (SIPPs) – A form of personal pension but with still more investment possibilities. You can, in some instances, get your SIPP to buy commercial or agricultural property (but not residential property) which can have tax advantages, especially capital gains tax.
Annuity – It can be described as an exchange of a lump sum for a series of regular payments. These payments are guaranteed for life but typically stop when the planholder dies.
Unsecured pension (USP) – Your fund remains invested and (hopefully) growing and you strip off an income from the fund. The downside is that, if you take high income and get low or negative returns on your investment, your fund could decrease, potentially to nothing.
Variable annuities – Also termed “third way” products, these are essentially USPs but with an income guarantee like a conventional annuity.