You could argue that your pension is not being properly managed if you have not had your risk assessed in the last 12 months. David Woodward explains.
Over the years I’ve met with hundreds of clients to determine why they feel they need to see a financial adviser and how best I can help? One area is pension management. A typical question I would ask is; “what retirement provision have you made”? For those that may be reading this, I have lost count of how many times I’ve been told: “My pension is rubbish!”
In the majority of cases, it’s not the pension that is rubbish, it’s what is inside the pension that matters and if it is actively or passively managed or worse, it’s not been looked at for many years.
UNDERSTANDING PENSION MANAGEMENT
An adviser always needs to determine what level of risk you are willing to take and when you need to take benefits? This is a critical part of the process, which should not be rushed. Illness, employment change, starting a family or divorce are examples of life events that could impact your risk, hence this needs to be reviewed annually. When did you last review your risk?
Most people with a pension have either set up a pension with an employer and been asked on the spot “What is your risk, pick one.” This would likely have been something like 70/30, 50/50 or 60/40 split. Sound familiar?
PENSION MANAGEMENT RISK VS REWARD
If your risk is not properly assessed you may be overexposed or underexposed to risk depending on your current situation. Similar to the Grand National horse race, you can easily fall at the first fence by applying the wrong risk to your pension. It is a mistake that can have dire consequences on you reaching your retirement goals.
Alternatively, you may have seen an adviser in the past and had a bespoke portfolio built. The crucial consideration here is a portfolio constructed five years ago is only as good as it was on the day it was put together, so hopefully, you continued that relationship. It is estimated that consumers who have used a financial adviser for more than 10 years are between 25 per cent and 40 per cent better off in retirement.
So you could argue that your pension is not being properly managed if you have not had your risk assessed in the last 12 months.
TAKING A LONG VIEW
Market timing is something else to consider and important when topping up a pension. Imagine a wave building as it moves towards the beach – like the stock market as it gets higher and higher until the inevitable happens. If the markets went through a sustained euphoric rally, how do you build on this? Where do the markets go at that point? Reverting back to the wave analogy, when it hits the beach the wave collapses under its own weight – in market terms, a correction or crash follows. Have you heard the saying ‘buy low, sell high’?
For an experienced adviser giving financial advice is skilled but still, the easy part. Determining how to make pension contributions so that you keep your child benefit or utilising three years carry forward annual allowance. Providing financial advice with real investment knowledge and experience is how only a few advisers excel. If you have lost touch with your adviser make sure you do your homework when looking for a new one.
WHY TALK TO A FINANCIAL ADVISER?
When searching for an adviser, have you ever heard on the TV or Radio ‘always seek restricted advice’? Exactly, no! Why go to the corner shop when you can visit the supermarket to select from the whole of market and at a lower price? Always seek independent advice; this is the gold standard, so why accept anything less. There are advisers who are restricted but mask themselves under fancy branding or chartered status. In life, it pays to be cautious, while I can tell the difference, the inexperienced investor can easily be hoodwinked.
It may come as a bit of a shock but once your portfolio is constructed and your risk has been agreed, some advisers can’t deliver on the service they have promised. I’m not pointing the finger, but how many times has your adviser made changes in the past 6 months? Or how often have they been in touch in the past year?
How do I know this happens? Because I tend to pick up the pieces when it all goes wrong, I look at someone’s pension statement, and scratch my head. Why were they holding investments for a rising bull market when the markets were clearly in a falling bear market? Why did they reduce risk when the markets had already fallen? An easy question to answer, they are likely good at financial planning but have little or no investment experience.
Most pensions hold professionally managed collective funds, this is when a fund manager pools money for a number of investors and buys shares, property, cash assets, bonds and other investments. A pension is likely to hold a number of these funds with a target asset allocation to meet your risk. For example, in a fund holding around 30-60 equities, if you held 10 funds you would have exposure to 300-600 companies, which is why a fund-based approach further diversifies an investment portfolio and reduces risk rather than holding 10 equities directly.