Mechanic Nick: The value of bolting down your pension
An annuity is a retirement income plan bought with your pension pot.
It’s designed to provide you a guaranteed regular income for the rest of your life.
The amount of income you’ll get for a given lump sum will depend on your age, health, lifestyle and type of annuity.
Nick, aged 57, is a London mechanic with 30 years’ experience of making sure clients can get from A to B. He knows a clutch from a carburettor and everything in between, but he’s also seeking to become an expert when it comes to saving for the future.
A recent survey found that four in 10 of 18-30 year olds rate their pension knowledge as poor or very poor, and nearly three quarters (71%) also said they found pensions jargon to be confusing1. Nick is in the same boat, he told us he’s worried that, “along with many people, my knowledge is sparse.” However, having recognised that there’s a gap in his knowledge, he’s tried to combat this by staying up to date with financial news; reading up in print and online whenever he can.
Nick’s recent interest in getting to grips with his options for retirement is due to the fact that, like a quarter (27%) of people nearing retirement, he will need to work as long as he can2.
“I am aware of the difficulties ahead but I have been unable to make additional and adequate provisions for retirement.”
This is not an uncommon problem. However, over three quarters3 (78%) of employed people of retirement age find their work fulfilling. For those who can, give your future self the ability to choose by getting started as early as possible.
Looking back in hindsight
Nick recommends that people free up time to review their pension plan, no matter how confusing or far away it may seem. He predicts:
The reality is that pensions are so long term one can't see any value in the short to long-medium term. The concept of deferred gratification for many millennials is anathema: preferring instant gratification every time...the “I must have it now” generation.”
Our research mirrors Nick’s advice to the younger generation, showing that 24% of millennials don’t have any pension provision (and have no plans to), and that 32% are not actively managing their finances4. As well as this, our recent short film featuring life coach John Paul Flintoff also shows just how hard it is to picture your retirement as something that’s within your control. But, with the arrival of auto-enrolment which will be fully in place by 2018, it is hoped that young people will be required to take more notice, and begin making pension provisions.
For Nick, keeping active as he gets older is certainly a priority, and he participates in both football and tennis, as well as enjoying time with friends and his wife and kids. He says the thing he’s most looking forward to is “a healthy and hopefully happy future with more free time.” And, while Nick’s financial future is not as straightforward as he may have hoped, his final piece of advice when it comes to saving is simple:
Do it! Whatever you can realistically afford, however little it may be - and review this on an ongoing basis.
The value of your pension investment is not guaranteed and can go down as well as up and you could get back less than has been paid in.
Annuity or Lump sum?
In the video Nick talks through some pretty confusing pensions jargon. If you’re reading this and you’re wondering difference between an annuity and a lump sum, you’re not alone.
Annuities: Annuities are products you can buy with your pension pot that give you a guaranteed income; sometimes for the rest of your life and sometimes for a fixed number of years, depending on your deal. This is an option for people who want to be safe in the knowledge that they’ll be provided for as long as you need.
Lump sum: Some people prefer to take their pension as a lump sum, whereby you’re allowed 25% tax-free. The rest will be at the highest rate of income tax you pay, but it may be a choice for those who wish to take a larger sum all at once.
Both options should be considered carefully with plenty of financial advice, and you can mix and match depending on your situation and plans.
Using your pension money
How can you use the money you’ve built up in your pension? Learn about your options here.