Retirement planning isn’t easy and getting private pension advice isn’t always cheap, especially when it comes to meaningful financial planning and advice.
Individual Retirement Accounts (IRAs) remain one of the favored ways of preparing for retirement in the US. Widely popular thanks to their valuable tax advantages and the opportunity for investment growth, they can be a highly efficient way to create a savings pot for later life. However, they do also come with complicated tax rules and specialist jargon, making pension planning seem somewhat daunting.
It can feel like there are a lot of decisions to make, and the stakes couldn’t be higher; you don’t want to arrive at your retirement to suddenly find you don’t have enough to live the kind of lifestyle you want.
No matter what your concerns are, if you’re struggling to plan for your financial future, you should consider looking for financial advice all about pensions.
Here are the five best ways to find pension advice for a private or personal pension.
1. Find a free pension advice service
The first place you could look for advice is a free pension advice service.
These free services could provide you with impartial guidance on everything from personal pensions and tax relief, to how much you might need in the way of pension income.
Bear in mind: these free services are for information only. They cannot provide you with personalized advice that’s specific to your circumstances.
Pension Rights Center
The Pension Rights Center is a great place to start for free pension advice.
The Pension Rights Center is a not-for-profit information that for over four decades has worked to ensure that every American has enough equity in their retirement to enjoy the fall of their life. The site is designed to provide accessible financial information for all US adults. Featuring a wealth of useful resources including an information center and financial planning tools. As well as information and planning services the website also provides a personal advice service which can be accessed via the websites “contact us” feature.
With a long history, and a great track record the Pension Rights Center is there to help you.
Pension Help America
Pension Help America is a service of the Pension Rights Center and helps connect Americans with counseling projects, government agencies, and legal service providers that offer free information and assistance regarding pensions. And via their free pension counselling project may be able to provide free legal assistance for those looking to plan for their retirement. Also available are resources covering a wide range of topics such as Private-Sector Pensions, Social Security, as well as pension calculators.
2. Speak to your workplace pension scheme manager
If you work in a business or for someone else, as opposed to being self-employed, you could speak to your workplace pension manager.
How do workplace pensions work?
When you start work or change jobs, your new employer may offer you a pension, these are either “defined benefit” (DB) plans or “defined contribution” (DC) plans, and then a pay-as-you-go plan (Social Security). Generally, you should research your company’s potential pension offering, and if you decide that you want to stay for the long-run then it is certainly worthwhile enrolling in their pension plan.
If you do decide that the pension plan is for you, then any contributions you make are taken directly from your income on a monthly basis. Your employer will also pay in, too. These are known as “defined contribution” pension schemes.
These are different from “defined benefit” pension schemes. Here, the amount of pension you will receive is determined by factors such as your length of service and salary.
These pension contributions are invested by the scheme into a pension fund. The fund will contain a range of diversified investments, designed to provide a return on all the contributions made to the fund.
How much gets paid into my pension plan?
The amount paid into your workplace pension plan varies from employer to employer, you should check the level of contributions made into the pension plan by your employer. However, it should be noted that pension plans are becoming increasingly rare in the private sector and that 401(k)’s have almost entirely supplanted pension plans.
If your main pension plan consists of a 401(k) then many employers offer matching contributions, meaning they contribute additional money to an employee account (up to a certain level) whenever the employee makes their own contributions. For example, assume your employer offers a 50% match of your individual contributions to your 401(k) up to 6% of your salary. You earn $69,392 and contribute $4,163 (6%) to your 401(k), so your employer contributes an additional $2,081.
What are the tax benefits?
Paying into a pension plan is a great way of reducing the tax burden on your wages as the deduction from your salary reduces your taxable income. It is only once you start receiving payments from your pension plan then these are taxed as ordinary income. That said you should be aware that if you withdraw the money early, you may face an early distribution penalty. Also, there may be a minimum distribution penalty if you take out less than the required minimum distribution.
In any case as the pension plan helps you spread your tax burden out over the long-term it is considered as being a tax-efficient way of saving.
Speaking to your workplace pension provider
Some workplace pensions will have a dedicated manager that you can contact directly, or you may be able to find the contact information for the pension provider.
They’ll be able to help you with any questions you have about how the scheme works. However, unless the scheme is managed by a financial advisor, they won’t be able to provide personalized financial advice.
If there’s no specific scheme manager, the company will have a help desk you can contact with any queries about your pension.
Again, they won’t be able to provide personalized advice.
What if I’ve had multiple workplace pensions?
It’s possible that you’ve worked multiple jobs, and so you’ve been enrolled in many different workplace pension schemes.
If this is the case for you, there are two options you could take.
1. Leave them as they are
- You could just leave each pot as is and let them continue growing.
- This way each of your pensions will invest in different funds made up of different investments, meaning you have a more diversified set of investments.
- Put simply this means that if one fund doesn’t perform well, there’s a greater chance that those losses may be covered by the other fund and its potential rise in value.
2. Consolidate all your pensions under one scheme
- Alternatively, you could move all your pensions into one scheme.
- This would mean transferring all your various schemes into a single unified pension pot. This is useful as it helps make managing your pension easier. Another benefit is that it could help potentially reduce the charges you’re paying on your investments, and benefit from better fund performance.
- However, this would mean you lose the advantages that a diversified pension portfolio would offer you. Also, you could lose the perks and benefits that are unique to the individual pension plan.
- This is a tricky and potentially costly thing to do. Make sure you speak to an advisor before you decide one way or the other.
3. Speak to a private personal pensions provider
Private personal pensions are similar to most workplace schemes. The main differences are that you start the pension yourself, rather than being enrolled via your workplace, and you don’t receive any employer contributions.
This makes them ideal as an extra pension pot to provide more diversification to your retirement savings. They are also useful for self-employed workers.
Generally speaking, the most common type of private pension is an individual retirement account (IRA).
What is an IRA?
An IRA is a savings account with tax advantages that individuals can open to save and invest in the long term and is considered a great choice for those wanting to plan for their retirement.
As long as you have an earned income you can open an IRA and enjoy the tax benefits these accounts offer.
You can open an IRA through a bank, an investment company, an online brokerage, or a personal broker. If you decide to open an IRA then you will have a choice of different products including traditional IRAs, Roth IRAs, SEP IRAs, and SIMPLE IRAs. Each of which have their own set of benefits.
Once you start putting money into your IRA the money will be invested on your behalf in their range of funds. And as most IRAs are tax deductible any contributions that you make will help lower your taxable income for that year. Though it should be noted that your contribution in a single year cannot exceed $6,000.
Generally, the choice of actual IRA depends on the preference of the individual and as such it is advisable to familiarize yourself with the different products and their particularities, either yourself or by consulting a professional. In any case I will give a quick run-down of the main types of IRA you can pick from currently on the market.
Traditional IRA
This offers an upfront tax break of up to $6,000 in 2021 and 2022, plus an extra $1,000 catch-up contribution if you’re age 50 or older.
Investment earnings are not taxed as long as the money remains in the protection of the account, but withdrawals are
Roth IRA
Contributions are not deductible but withdrawals in retirement are completely tax-free.
Also, you can make withdrawals early without being penalized, providing you with greater financial autonomy.
Nondeductible IRA
As the name implies is an IRA that does not offer tax breaks, and as such is intended for individuals whose income exceeds the requirement limits on a traditional IRA.
However, earnings within the IRA are tax exempt and taxes in retirement are due on any earnings growth you withdraw, but not the principal.
SIMPLE IRA
Is a Savings Incentive Match Plan for Employees IRA, designed for small companies and the self-employed. You can contribute to the account via salary deferral, but early withdrawal fees can be extremely high.
Self-directed IRA
Is an IRA in which you’re allowed to own assets such as real estate and hard assets.
Not recommended for inexperienced investors.
Which pension should I choose if I’m self-employed?
For self-employed individuals without access to a workplace pension scheme, a SEP IRA or SIMPLE IRA are worth considering.
The choice depends on your personal circumstance but regardless of the specific IRA you decide to open it will serve as the foundation of a retirement nest-egg.
You’ll also be able to make the most of potential investment returns on your contributions.
If you’re self-employed and you’d like to find out which type of pension would most suit you, check our ranking of the best pension providers for self-employed people.
How much should I pay into a private pension pot?
Realistically, it depends on your personal circumstances and the kind of lifestyle you’re targeting in retirement.
While there isn’t a one-size-fits-all solution, there are a couple of popular methods some savers employ.
Contributing half your age
One way to measure your contributions is to contribute a percentage of your earnings that’s equal to half your age.
So, when you’re 32, you should look to be contributing 16% of your current earnings to your pension.
This method ensures your contributions grow with you as you get older and your income increases.
The “50-70” rule
Another way to look at your contributions is to use the “50-70” rule, in which your target retirement income is between 50% and 70% of your current earnings.
So, if you earn $50,000, you’ll need between $25,000 and $35,000 as a regular income in retirement to maintain your current standard of living.
In any case once you have a goal in mind you can adjust your contributions accordingly.
Speaking to your pension plan provider
Nearly all personal pension providers have a help desk where you can ask questions about their specific products.
They’ll be able to provide you with more detailed information, as well as the range of available funds and investment choices open to you.
Also, they should be able to give you an idea of the typical sort of fees you can expect to pay.
However, be aware that this help is not from financial advisors. They won’t be able to provide personalized, independent financial advice that’s specific to you.
4. Speak to a bank, credit union, brokerage or mutual fund company
One place you might not have thought of going to for pension advice is your bank or similar financial institution.
Speaking to someone face-to-face
You can simply walk into the nearest local branch and ask if someone is available to answer questions you have about pensions, worst case scenario you will be asked to make an appointment in advance.
That said similar to pension scheme managers, they may only be able to speak generally about pensions. The advice will likely not be personalized to you.
You should bear in mind that any advice they give will be restricted to the pension products they offer. This means you may not get a full picture of the best options for you.
Online pension services
Some financial institutions may also offer online pension services.
For example, banks such as Bank of America have a full range of pension guides and articles explaining the different types of pensions available.
Partnering with a financial advisor
Some credit unions have financial specialists or partner with financial advice firms that account holders can make the most of.
Contact your bank or credit union to find out whether they offer this kind of service.
Bear in mind that you may have to have a certain level of wealth to make use of a service like this.
5. Work with a financial advisor
If you’re particularly unsure about what to do, you should speak to a pension specialist and take financial advice.
Why should I take advice?
A financial advisor can look at your entire financial situation and give you personalized advice based on your income, expenditure, and current and future circumstances. They can take your goals and ambitions into account, too.
So, for example, if you wanted to retire at 55, a financial advisor will create a bespoke plan targeting that goal.
The majority of financial advisors are entirely independent, meaning they can recommend the right pension for you from a wide range of providers, rather than being restricted to specific products.
How much should I expect to pay for pension advice?
The cost of advice will vary from advisor to advisor.
Typically, there are three ways advisors can charge for pension advice. Your advisor must be upfront about which of these models they use and how much the advice they provide is going to cost you.
Flat fees
Your advisor gives you a set rate for how much they’re going to charge. This could be an annual fee, or a separate fee for each piece of work they do for you.
Hourly fees
Your advisor tells you their rate and then provides a breakdown of how long they’ve spent working on you and your financial plan.
Proportional
Your advisor takes a percentage amount of your assets. There could be an initial fee, and then an ongoing management charge.
Typically, a fair percentage rate is about 1%, in any case be aware that the larger the value of your pension pot the more money you will be paying as a percentage.
How do I choose a financial advisor?
There are plenty of ways to find a trusted financial advisor.Perhaps the easiest is to look at the website of the National Association of Personal Financial Advisors. The association’s website, napfa.org, allows you to find an accredited financial advisor near you.Or you can use our dedicated “find a local advisor” tool to find the best advisors near you.Alternatively, you can sign up for a free pension review from a professional advisor.
When you think about your pension, your mind may well go straight to the workplace or personal pensions you have.
However, it’s important to remember that you will also receive your Social Security when you reach the qualifying age.
Currently, the Social Security payment age is 67 for anyone born after 1954.You may think this money won’t contribute hugely to your retirement income. But, actually, having a guaranteed income that won’t be affected by investment returns or tax can be a great benefit.
You can be confident that there will always be money coming in to help towards bills, even if it won’t be enough in itself to fund your whole retirement.
You’ll only receive a full Social Security if you’ve made sufficient contributions throughout your working life. You normally need at least 10 qualifying years to receive Social Security payments.
The maximum benefit depends on the age you retire. For example, if you retire at full retirement age in 2022, your maximum benefit would be $3,345. However, if you retire at age 62 in 2022, your maximum benefit would be $2,364. If you retire at age 70 in 2022, your maximum benefit would be $4,194.You can use the Social Security Office website at www.ssa.gov to check your entitlements.
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