Getting expert advice when the time comes to start drawing an income from your pension is invaluable. But, as with anything, amongst financial advisors there are the good, the bad and the downright ugly.
While the latter may convince you to move your pension and lose out on invaluable benefits or end up with a huge tax bill, the bad may give you legal advice it could be far from the best for your situation.
So the key is finding out when you need it, where to get it and how much it will cost.
A practical example
The Telegraph provides the example of a man whose independent financial advisor (IFA) charged him £4,500 for advice that on the face of it isn’t terrible, but it could have been far better and a lot cheaper.
Simon Williams – a false name – had a £420,000 pension pot that he wanted to take into drawdown – meaning he would take an income from it each year while it remained invested.
His IFA recommended he invest his pot across two funds the Vanguard Lifestrategy 80% equity fund and the Vanguard Lifestrategy 40% equity fund.
He paid 1% of the value of his Self-Invested Pension Plan (SIPP) to set up this advice, meaning he paid a whopping £4,500 to have his money placed in two tracker funds. He was also told he would be charged 1% a year for advice and 0.22% management fees for each tracker fund.
What’s wrong with that advice?
- The cost – Williams has been massively overcharged with most advisors telling the Telegraph he shouldn’t have paid more than around £2,000 for that initial advice.
- The spread – investing almost half a million pounds in just two funds falls far short of the usual level of diversity that you want with a portfolio of that size. Really it should be spread across around 20 funds.
To add to the problem the two funds invest in several of the same things meaning there is even less diversity. A £420,000 portfolio should include a wide range of investments including shares and bonds as well as both active and passive investments, not just two tracker funds.
- The risk – all of his money is invested with Vanguard but the Financial Services Compensation Scheme (FSCS) only covers the first £50,000 if an investment firm goes bust meaning Williams risks losing £370,000.
- The income – Williams’ IFA told him this investment plan would result in an annual income of around £36,000 once added to his other income streams.
Given the funds yield just 1.5% this is described as a “tall order” by Justin Modray, director of Candid Financial Advice, in the Telegraph.
- The personal service – the advice Williams received also failed to take into account his own aims. His risk profile was assessed as being able to tolerate medium to high-risk investments, but half his portfolio was placed in a low-risk fund.
How to find good advice
Mr Williams received advice that on the face of it may have seemed expensive, but not terrible, until you get other experts to analyse it.
Without taking yourself to several IFAs how can you make sure you get advice that suits your needs?
The answer is to be careful about where you go for advice and assess the advice you receive before you act on it.
- Find a good IFA – You can use unbiased.co.uk to find a qualified IFA in your area that specialises in pensions. Once you have a name, take the time to look around for reviews, TrustPilot is a good place to check.
- Assess your advisor – You should be able to have a brief meeting with your IFA to work out if they are right for you before you commit to paying them anything. Use this time to ask them what qualifications they have, how much experience they have, what services they offer and how much they charge.
They should also be able to give you a rough idea of how they would help you personally.
- Assess the advice – If you think you’ve found the right advisor go on to have your meetings but assess any advice they give you before you act upon it.
Compare it to the story above and consider whether the investments suggested will give you enough diversification, match your attitude to risk and will provide you with a realistic income based on your overall investment size.
And remember, you are allowed to take tax-free cash from your pension to pay for your advice.
If you want to learn more about retirement planning, read our comprehensive guide to pensions.