Your pension is what will support you during your retirement years, so it’s important that you maximise your fund and understand how it works. But with many different types of pensions out there, and with most people having multiple workplace pensions from their various employers over the years, it can get pretty confusing.

Read our guide to pension advice to find out how much it will cost, what types of pensions are available and what you can do to maximise your money.

How much does pension advice cost?

How much pension advice costs depends on what you want a financial advisor to do, what stage of life you’re at, and what type of pension you have.

Here are some of the average costs of pension advice based on the different advice you might need:

Type of advice	Average cost
Advice on a £300 per month pension contribution	£500
Advice on a defined benefit pension transfer (with a transfer value of £100,000)	£2,500
At-retirement advice on a £250,000 pension pot	£3,000
Consolidating pensions with a value of £500,000	£5,000
Ongoing annual pension reviews (for pots with a value of less than £65,000)	£400 per year
Ongoing annual pension reviews (for pots with a value of £65,000+)	0.5% of the fund value per year

Make sure you understand your financial advisor’s fees before you agree to take any pension advice from them. Most financial advisors will offer a free consultation, but not all – so make sure you have everything in writing before you start.

How do pensions work?

A pension is a way to save money for your retirement in a tax-efficient way. One of the most common types of pension is a workplace pension, where you and your employer save money into it.

The government adds money to your pension in the form of pension tax relief to encourage you to save.

You can also have other personal or private pensions that you’ve set up yourself, and you can contribute to many different pensions as long as you stay within your annual and lifetime limits.

There are different types of pensions, but most of them operate in the same way:

1. You and/or your employer make contributions to your pension.

2. You’ll get tax relief on the pension contributions you make.

3. Hopefully, your pension pot will grow as you make more contributions and the value of your investments rise. Remember, the value of your pension could fall too, meaning that in times of financial instability your pension pot could shrink.

Types of pension

There are two main types of pension: defined contribution (which is the most common workplace pension) and defined benefit, which is mainly only used in the public sector today. Within these two main types, there are other kinds of pension available, which we’ll explain below:

Defined contribution

Defined contribution pensions are like a savings pot, where you pay money in and the money builds up. However, you should get more interest than in a standard savings account, as your money is invested into a fund that should provide long-term growth.

The ‘defined contribution’ is the amount of money you pay into your pension, but the actual size of your pension pot will vary depending on how your fund performs – remember, investments can go down as well as up.

Most workplace pensions and all personal pensions work this way, but there are different kinds of defined contribution pensions:

SSAS: Small self-administered pension schemes (SSAS) are usually set up for a small number of senior staff in a company – usually directors or senior executives. They’re a specialist type of employer-sponsored defined contribution pension that allow the member to take up to 25% of their pot as a tax-free lump sum, with the rest providing an income. The amount the member can get from an SSAS depends on how much has been paid in on their behalf and how long each contribution has been invested.

SIPP: Self-invested personal pensions (SIPPs) works in a similar way to standard personal pensions, but there are more investment options for you to choose from, including company shares, investment trusts and property and land (but not residential property).

Defined benefit

Defined benefit pensions are mainly only used in the public sector now. They are like a contract with your employer, where their scheme agrees to pay you a fixed income from a certain date until you die.

Unlike the defined contribution pension, your eventual pension income is the known figure, which is why it’s called ‘defined benefit’.

How much your income will be from a defined benefit pension depends on the size of your salary when you leave your employment, or the average salary over that employment, how long you worked there as a member of the pension scheme and what the scheme’s accrual rate is.

With a defined benefit pension, you can make additional contributions to increase your retirement benefits. These are called additional voluntary contributions (AVCs).

Consolidating pensions

A financial advisor can help you consolidate, or combine, your pension pots. During your working life, you may work for many different employers and end up with a variety of different workplace pensions. It can be easier to consolidate them all into one pot to help you keep track of how much you have saved for your retirement.

A financial advisor can help you decide whether it’s worth combining your pensions. There are a few reasons why you might want to consolidate them, including:

• Keeping track of your retirement pot

• Saving money on management fees

• Achieving better growth

While you might think it makes sense to combine your pensions into the fund with the lowest fees, your financial advisor may be able to find a find that offers better growth with slightly higher fees that may cancel those fees out. They may even recommend a new fund, so it’s important that you talk through all the options and understand what’s involved before making a decision.

FAQs

Is it worth paying a financial advisor to manage a pension?

It’s not compulsory to pay a financial advisor to manage your pension or offer you advice on starting or consolidating pensions, but it could be worth it.

Speaking to a financial advisor could actually make you wealthier in retirement over the long term, meaning the net cost of getting financial advice is negative. A financial advisor can help you be more tax efficient, make better investments and reduce management fees, so a lot of the time it is worth paying one to help you.

Do I have to use a financial advisor to transfer my pension?

Transferring a pension can mean two things: trading in a defined benefit pension scheme, or moving or combining a defined contribution pension with others.

If you want to trade in a defined benefit pension to a defined contribution pension, you don’t necessarily need to use a financial advisor. However, if your pension has a transfer value of £30,000 or more, then you’re legally required to get financial advice first.

For moving or combining defined contribution pensions, you don’t need to get financial advice, but it may be worth doing so to ensure you maximise your growth and pay as little in fees as possible. A financial advisor will be able to help you make the right decision for you.

Do I need a financial advisor to take 25% of my pension?

At 55, or 57 from 2028, you can take 25% of your pension in what’s called ‘pension drawdown’. This allows you to withdraw a portion of your pension while keeping the rest invested to (hopefully) continue to grow.

You don’t need a financial advisor to take 25% of your pension, but it can be a good idea to use one. They will be able to give you advice based on your financial situation to allow you to maximise your investments while giving you access to money when you need it.

How much tax will I pay on my pension lump sum?

Some of your pension is tax-free. Usually, most defined contribution pensions will allow you to take 25% of your pension as a lump sum tax-free, leaving the remaining 75% to be charged income tax.

If you have a defined benefit pension, most of these schemes will also allow you to take a tax-free lump sum leaving the rest as a guaranteed taxable income.

What is the Money Purchase Annual Allowance (MPAA)?

The Money Purchase Annual Allowance (MPAA) is a restriction on the amount that you can pay into your pension and still get tax relief. It replaces your annual allowance after you’ve started to draw from your pension.

Everyone has an annual allowance, which is £40,000 or 100% of your qualifying earnings, whichever is lower. However, once you’ve started to draw from your pension, this allowance is replaced by the MPAA and is just £10,000 per tax year.

The MPAA is designed to stop people from trying to avoid tax on their current earnings or get tax relief twice by withdrawing their pension then paying them straight back in again.

If you need pension advice, find an independent financial advisor with HaMuch through our partners, Unbiased. You may save money over the lifetime of your pension with the right advice.

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