How DIYing your pension can cause lasting damage
How good are you at DIY? You may have decorated your living room before, upcycled a piece of furniture or tried to fix that leaky sink.
With most household DIY projects, you can usually call in an expert to clean up your mess if you get it wrong.
But can the same be said for DIYing your pension and investments?
I recently got a call from a potential new client who’d decided to go down the DIY route and manage her pension by herself. We’ll call her Susan.
Susan was 65 and at retirement when she started looking at her pension. She had a good NHS pension, a state pension and a small (£40k) private pension.
She thought: “This is easy. I’ll sort out my own retirement income. Away we go!”
Unfortunately, it wasn’t smooth sailing. In fact, she got into a right mess. Not only did it cost her financially, it wasted her precious time too, just at the point when she should have been enjoying her new-found freedom. And that’s something none of us can get back.
Here are just a few of the horror stories she faced:
It took two years to get her pension funds transferred
She received a poor service from her pension provider
She wasted countless hours trying to get things sorted out with them
Her funds had fallen in value
She had no understanding of investments or strategy and was starting to panic
We’d like to be clear that we’re not shaming Susan or anyone who can relate to her struggles. These mistakes and problems aren’t uncommon for those who try to manage their retirement savings themselves.
After all, if you don’t live and breathe pensions and investments like we do, how are you to know what’s a good decision and what’s not?
DIY investing has come into its own in recent years
Digitisation has led to a huge number of online apps being launched that make investing look easy. And we’re all for things that make it easy for people to save - managing your own investments can be better than not investing at all (providing you’re reasonably well informed and don’t invest more than you can afford to lose).
But many people go into this blindly, not knowing the pitfalls they could come up against.
They don’t realise that working with an adviser can make a real difference to the performance of their portfolio.
It could be the difference between having enough in retirement for an annual city break versus having an annual city break, cruise, and extended family holiday.
Let’s take a look at how different Susan’s life could be if she’d sought the help of an adviser.
We’ll take care of the admin for you
You probably have big dreams for your retirement.
Maybe you want to spend more time with your family, travel or completely transform your garden into a suburban paradise.
What you don’t want to be doing is managing endless paperwork and making dozens of phone calls in an attempt to access your hard-earned money.
If Susan had hired a financial adviser, she’d be able to do the things she’d spent years dreaming about, while an expert took care of all the admin.
If you hate being passed from pillar to post when trying to resolve an important issue over the phone (and who doesn’t?!) an adviser is worth their weight in gold.
Forward planning and strategy
It’s completely normal for our investments to rise and fall, so the fact Susan’s portfolio has dropped in value isn’t necessarily a sign she’s invested in the wrong thing.
The problem is that her portfolio’s worth fell when she needed access to it the most. Had she worked with a trustworthy and knowledgeable financial adviser, they’d be planning her retirement a few years in advance, rather than at the last minute.
They’d have a strategy in place to protect her against market fluctuations in the years leading up to her big date.
Another mistake that Susan made was not knowing how much income to take from her fund. We ran some calculations and found that that she was taking too much and that she’d probably run out of money at 70 and have to rely on the state pension at that point. An adviser would make sure that her income levels were more balanced and last longer.
Protection from uninformed decisions
A good adviser can protect DIY investors from making uninformed decisions based on their limited understanding of finance.
Take for example the recent Pension Bee controversy. The company has been criticised after emailing its customers telling them they could speed up the consolidation process thanks to the “option to waive checking for exit fees and valuable benefits”.
The letter continues: “With some providers, some older pensions may have exit fees or special benefits, such as guaranteed annuity rates and protected tax-free cash.”
The letter has been widely criticised by advisers for encouraging customers to make pension decisions that could cost them in the long run.
Ongoing support and encouragement
Not only would an adviser help Susan choose the right investments in the first place, they’d also support her during times of economic or political uncertainty, when the markets are all over the place and stress can be at an all-time high.
If you’ve checked your investment account recently, you’ll know what we’re talking about.
The Bank of England has warned that we may be heading towards a recession. At times like this, it’s an adviser’s job to discourage their clients from panic-selling their stocks on a whim and hoarding it all in cash.
If you’re wondering whether to go the DIY route or hire an adviser to oversee your finances for you, consider how you’d like your life to look both in retirement and in the lead up to it.
Do you want to be sipping a cocktail on the beach or on hold to yet another call centre with a mound of paperwork on your desk?
It’s never too late to speak to a financial adviser, but the sooner the better. The longer you spend trying to master the art of financial planning and pensions yourself, the harder the messes become to fix.