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We all know the importance of pension provision, but could seeking financial advice give you an advantage when investing for your retirement?

Investing for retirement is about making sensible decisions and taking maximum advantage of pension tax breaks. Like most good things in life, investing for your retirement takes time, patience and know-how.

Some people may feel comfortable taking on this responsibility alone, while others may want the reassurance of professional help, either regularly or at selected points in time. But, as we shall explore here, sometimes there are situations where it is compulsory to take professional advice on your pension.

That’s why it’s important to understand the differences between state, personal, and workplace pensions, and how financial advice can help guide you to make the most of your pension contributions.

How do state, workplace, and personal pensions differ?

When working out how much money you need for retirement, it is important to understand the difference between the state, workplace and personal pensions.

The state pension is paid by the government to anyone reaching state pension age (currently 66 for men and women, although this will start rising again from May 2026), provided they have made sufficient years of National Insurance contributions to receive it. The full state pension is set at £185.15 per week for the 2022/23 tax year (or a basic rate is £141.85 for those with fewer than 30 years of National Insurance contributions).

However, with the rising cost of living, most of us are likely to need more than this to fund our retirement. This is where personal and employer pensions come in.

For workplace pensions, individuals and employers pay into these throughout their working lives and people take the money out at retirement. They include work-based pensions in which employees may be auto-enrolled by an employer, who will also make contributions before tax. Under the Pensions Act 2008, every employer in the UK must put certain staff into a workplace pension scheme and contribute towards it.

Personal pensions, on the other hand, are set up by individuals themselves, and both they and their employers can make contributions towards them. The difference with a personal pension is that you (or your investment or wealth manager) make the investment decisions.

A key benefit of both workplace and personal pensions is that all contributions receive tax relief. Some providers, such as Nutmeg with its personal pension, automatically apply this relief at source, or in some cases you may have to claim this yourself.

Currently, HMRC sets tax relief at 20% up to the amount of any income you have paid 40% tax on; and by 25% up to the amount of any income you have paid 45% tax on.

If the tax relief is not applied at source, personal pension holders can claim this through their Self Assessment tax returns each year. You can also call or write to HMRC to claim if you pay income tax at 40%.

What are the potential rewards of a private pension?

The eventual size of a private pension pot will depend on the types of assets it is invested in, how long it has been invested for, and the behaviour of markets. While it is difficult to predict exactly how much a pension may be worth, online calculators can give you an estimated final value of your pension depending on how much you put in and your timescale.

The magic of compounding – where the returns on your investment in the early years gain returns themselves over time – is that, over decades, your pension has the potential to grow significantly in value.

What are the benefits of seeking financial advice?

You can seek financial advice either through an independent financial adviser, or through a wealth manager, such as Nutmeg, where we offer restricted financial planning and advice services to help people with their retirement planning. There are a number of advantages in taking this route, and they come into play at various stages in your financial journey.

  • An adviser can help you to set investment strategies

If you want to reach certain financial goals at certain times, including with your pension, an adviser can help you to work out the most efficient way to do this and how much to put away each month. They can also help you review your strategy to keep you on track.

  • An adviser can help you to be tax efficient

Paying too much to the taxman could leave you short in your later years. Financial advice could help you maximise the tax incentives given to savers each year. And they can help you to structure your spending in retirement, so you don’t pay too much of your pension to HMRC.

  • You could gain peace of mind

Investments can be volatile, of course. If you are the kind of person who finds it difficult to deal with seeing your money move up and down in value, a financial adviser can help reassure you about decisions and ensure your financial plans stay on target in difficult times.

  • An adviser can help consolidate your pension

If you have several pensions from former employers, an adviser could help you to consolidate them in one place and direct you on how to invest it.

When is financial advice required?

There are some situations where you are required to seek pension advice, so that you understand the implications of what you are doing.

The requirements depend on whether you are dealing with a defined benefit (DB) pension – sometimes referred to as final-salary pensions – where the income you receive in retirement is guaranteed, or a defined contribution (DC) pension, where the amount you receive depends on how your investments perform. The latter is the more common option in today’s workplace pensions because it is less complex and less expensive for an employer to run.

  • Transferring your pension

If you are transferring a DB pension to a DC pension, then you must seek financial advice. With DC schemes, typically you do not need to take advice when transferring from one pension to another, unless there are protected minimum benefits.

If you are planning on transferring a pension worth more than £30,000 to another provider and it has any safeguarded benefits attached, the financial regulator requires you to seek advice.

There is no obligation below this level or if there are no safeguarded benefits (such as guaranteed annuity rates, protected tax free cash etc). The cost of this advice ranges on average from 1% to 2% of the total pension pot. An example of a flat fee might be £3,000 for at-retirement advice on a £250,000 pension pot.

In addition to these situations where advice is compulsory, there are other times where it might be advisable.

These include:

  • Withdrawing money from a pension

The new rules around pensions that came into force in 2015 give you the option of buying an annuity with a pension pot or withdrawing money from it as needed. Financial advice can help you to decide how to do this in the most tax-efficient and useful way for you. You can also get free impartial guidance on this from the government by booking a Pension Wise appointment.

  • Buying an annuity with a portion of your pension

You can choose to buy an annuity, giving a guaranteed annual income, with some or all of your pension. You do not need to get financial advice to do this, but it may be helpful if you’re trying to decide whether to use all of your pension pot to do this or to take a hybrid approach. It will also be helpful if you want to ensure you get the best possible annuity rate.

How much does financial advice usually cost?

The cost of financial advice can vary and you may pay for it in different ways. Pension adviser fees may include:

  • A set hourly rate
  • A set fee for work completed
  • A fee based on the percentage of the value of the assets you hold

The most recent Cost of Advice survey from independent financial adviser group VouchedFor suggests that the average hourly rate is £192.

However, the cost of ongoing advice could turn out to be far more expensive than this. The same survey suggests that the cost of consolidating three £500,000 pension pots and receiving ongoing advice on them over five years would be £29,488 overall.

Nutmeg’s own restricted financial advice service costs a flat fee of £575, which includes an in-depth review of your current financial situation, retirement planning, tax planning, pension and investment advice, as well as a review of your existing investments with a cashflow forecast.

Should I DIY my pension or use a professional?

Some people choose to run their pension for themselves, using a DIY investment platform to buy and sell funds or shares within it. This may be the cheapest way of running a pension, but you do not get any advice. DIY platform costs will vary for holding investments, and this does not include costs levied by the funds themselves. And remember, you have to make all decisions yourself with a DIY portfolio.

In comparison, a wealth manager may charge between 1% and 1.5% of all your assets to invest your money, with fund charges on top. The manager will make all decisions for you with regards to investing.

Nutmeg’s offers competitive fees, as outlined on our website. There are underlying costs but no set-up, transaction, trading or exit fees. The portfolio will be invested by an expert in line with your risk tolerance.

How Nutmeg can help

Nutmeg’s award-winning pension, voted Boring Money’s Best Buy Pension 2022, can help you to manage your retirement planning in an easy and cost-efficient way.

You can also transfer existing pensions to Nutmeg and use our financial planning service to create a retirement plan that’s right for you. Book a free call to speak to the team to understand your options.

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To find out more, visit our personal pensions page.

Risk warning

As with all investing, your capital is at risk. The value of your portfolio with Nutmeg can go down as well as up and you may get back less than you invest. A pension may not be right for everyone and tax rules may change in the future. Please note that during any transfer, your investments will be out of the market. If you are unsure if a pension is right for you, please seek financial advice.