Starting anything new can be challenging when it’s easier stay as you are.
However, inertia can be costly when it comes to pensions because the earlier you start the more you money you make from compounding returns.
But the process of starting a pension can feel like a mysterious event for a lot of people so this article aims to lift the lid by outlining the simple steps involved.
Step 1: Understand Exactly How a Pension Works For You
The type of pension products available to you, and your specific funding options, depend on whether you’re a company director, self employed, sole trader or PAYE employee.
You can see exactly what this means for you by clicking here to use our calculator.
Step 2: Meet With an Advisor
The next step is to book a discovery meeting with a financial advisor to get clarity around your future lifestyle goals.
This meeting is important because you’ll be deciding if this advisor is the right one for you, someone you can trust and work with long-term.
This shouldn’t be underestimated because they will have a significant influence on how well you do since you will be basing some very influential decisions on the advice you get from them.
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Step 3: Complete a Fact-Finding Process
This is the dreary, but necessary, part of the whole exercise because it’s where your unique financial planning needs emerge.
Investing the time in this process is worthwhile because it means your plan can be as closely tailored to your needs as possible.
Step 4: Assess Your Tolerance For Risk
Starting a pension fund is not the same as opening a bank account.
Pension funds invest in a myriad of assets like stocks, bonds, property, commodities and alternatives.
They are also covered by a multitude of complicated, and ever-changing, rules.
As such, there are elements of both investment and legislative risk involved.
This, therefore, requires a greater degree of due diligence to ensure that you act according to your profile.
A risk profile questionnaire has 15 to 20 multiple-choice questions which will assign you a number between 1 and 7.
This is based on the European Securities and Markets Authority (ESMA) rating system with 1 representing low-risk tolerance and 7 representing high tolerance.
Risk and return are intrinsically linked so part of the discussion will involve the risks you deem acceptable to reach your goals.
Step 5: Select an Appropriate Investment Strategy
The way you invest your money will be influenced through a combination of your risk profile and personal preferences.
Some people like to be 100% involved in every aspect of their pension, whilst others couldn’t care less, so you can be as hands-on or hands-off as you want to be.
In general, you can choose between the following 3 options;
- Passive investing: Most people are happy enough to invest in low cost, index-tracking funds or ETF’s. This is the most popular way to participate in the markets since you just select a fund or range of funds to track the ups and downs of various indices.
- Active investing: This option uses fund managers to beat the market and tends to cost a bit more since you’re utilising the research and management expertise of a professional money manager to make investment decisions on your behalf.
- Self-directed investing: This is the most suitable option for those who have the time, interest and insight to fully manage their own portfolio and buy and sell their own assets.
Step 6: Get Started
There’s a lot of paperwork involved in starting a pension as you would expect in a regulated industry.
That said, there are 7 universal requirements needed to set up a pension;
- Your drivers license or passport as proof of identification,
- A utility bill dated within the last 3 months as proof of address,
- A pay slip, your last P60 or social services card as proof of your PPS number,
- Full details and values of current and pre-existing pension benefits,
- Confirmation of investment choice and start date,
- Full BIC & IBAN payment details along with signed direct debit mandate,
- Signatures on application forms, suitability statements and compliance documents.
…with an additional 5 requirements for executive schemes and director pensions;
- Confirmation of employment start date,
- Confirmation of your shareholding as a director (if applicable),
- Company registration number & VAT number,
- Application forms and letter of exchange signed by both employee and employer,
- Assignment of trustees.
Step 7: Review Your Plan Every Year
Pension plans are a long term financial commitment so they are somewhat different to other consumer products.
The objective of a pension is to accumulate as much cash as possible by the time you retire.
And it’s not a get-rich-quick scheme since it’s a process that typically happens over decades.
As such, there are a whole series of events that will influence its final value.
Reviewing your plans regularly will help you navigate any of the difficult times more effectively.
It’s said that product charges and decision making will be the two most influential factors on the size of your final fund.
That’s because the ability to make good financial decisions is literally the most valuable skill you can have.
And this is why your choice of financial advisor is so critical.
You can’t manage what you don’t measure so keeping track of your progress is vital to keep you on course.
Step 8: Enjoy The Retirement Lifestyle You’ve Created
Claiming a pension is not a particularly glamorous event.
It’s usually just a meeting room somewhere occupied by you, your spouse and a financial advisor.
But, this is the end game and all roads lead here.
This meeting is a big life event since it will determine how you spend your retirement.
The first order of business will be your account balance 100% of your options will be determined by the size of your fund.
Therefore, your objective with a pension from the outset, is to arrive at this meeting in the best shape possible.
The reward for doing so is that, with a sufficient fund in place, you’ll have the freedom to live your retirement on your own terms.
How great would it feel to know you made the most out of your working life?
How would the alternative feel?
Go ahead and make the decision your future self will thank you for.
Ok, So Where Do I Go From Here?
Your retirement starts with a plan and that plan starts with a single step.
Talk to you soon,