How To Be Pension Confident As You Create Your Dream Life

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We are living in very interesting times at the moment and for many, the “dream life” is the last thing they might be thinking about.

My money journey so far has taught me that such times of difficulty are exactly the right moments to revive and plan for that dream life 😀.

I’m living a version of life today that I can only describe as my dream life having started life from point zero as a newbie to the UK 20 years ago.

This dream life that we see today was born during the Great Financial Crisis of 2008 as I started to have a desire for a new life.

Today we’re financially independent and I took early retirement from my career path in April 2020 to focus on my passion for empowering and financially educating families.

This dream life was only made possible because I developed a money mindset biased towards optimising my life for freedom.

Part of that freedom journey involved me developing an attitude of confidence towards money.

I’d learned years ago that attitude is everything, and the same applies to money.

Getting pension confident was a key part of my money journey especially as I’d grown up in a home where my parents didn’t even have pensions.

I had to understand it and believe that it was one of the vehicles that I needed to invest into, in order to prepare for a future that lay ahead of me.

Today I want to share with you 5 key steps to becoming pension confident as you consider what a future dream life looks like for you.

How To Become Pension Confident

Let’s jump straight into these 5 steps below:

Step 1: Set Life Goals

Setting defined goals should be the beginning of every financial journey after establishing your why.

My “why” was to achieve financial independence and optional early retirement.

What is your “why” today? And what does that why look like in numbers?

Let me elaborate. Let’s say that you’re 35 years old and would like to have the option of early retirement at the age of 55. 

That gives you 20  years as a time horizon. 

Next questions to are:

• To maintain your lifestyle, how much in income would you need monthly?
• How much does your money pot need to be in order to give you that income?
• What average returns do you need per year to achieve that?
• And finally, how do you plug the gap between where you are now and where you need to be? I.e. what should you be saving (and investing)?

That’s a lot of questions to answer.

The one thing that makes it simple for you to arrive at an answer to that last question is to use a pension calculator.

Going through this process is what helps you to set your money goals and begin taking action to achieve them.

Step 2: How Do Pensions Work?

Understanding the key benefits of pensions is key to becoming pension confident.

For example, should you be investing in a Pension vs ISA? And why? 

One of the biggest benefits of investing in a pension is the generous tax reliefs.

Especially if you’re a higher rate tax payer. 

As a higher rate taxpayer you’ll get back 50% of amounts contributed to your pension compared to the 25% tax-free lump sum when you withdraw in the future.

Essentially, you’ll have a lot more of your money in a tax-free environment working for you for years before withdrawal in the future.

The same applies to an additional rate taxpayer. 

Step 3: Consolidate Your Pensions For Ease

One of the best things that I ever did with my old pensions was to get them consolidated for ease of understanding the costs and performance.

PensionBee and their team of BeeKeepers do a wonderful job of making this a completely stress free process for you.

And the best part? It is free to get started! They do all the work of contacting your multiple pension providers and bring together your pension pots into one account.

The process is pretty simple:

Go online or download the mobile app. → You pick your plan → Select your old pension provider names. → Hit Confirm.

Step 4: Understand Investment Fees

Investing money costs money and it’s important that you pay attention to fees for a number of reasons.

One such reason is the fact that you’re investing typically for a long term period. 

Therefore, always think of the cost of paying too much from the perspective of opportunity cost i.e. What are you losing by doing that?

Are you having to work more years than you need to? How about the fact that your wealth grows slower the more you pay out?

Note though that fees have to be balanced with service offering. 

I find it useful to check what levels of service I’m getting vs what I’m paying. E.g. Do I have enough transparency (e.g. performance) in my investing? 

Pension providers have historically been notorious for being opaque. So where you find a transparent provider, stick with them.

The other thing to check as well as is how your fees change as you hit certain wealth milestones such as £100k, £250k, etc.

Read more: Understanding Investing Fees and Why It Matters

Step 5: Understand Performance of Your Pension

It’s one thing deciding that you want to consolidate your pensions into one account. 

However, it’s another thing to make sure that your money is invested in the right assets such that you get that money working for you.

Then there is also the consideration of what your money is invested from an ethical investing perspective (if you care for that kinda stuff).

Getting money to work for you requires that you expose that money to sufficient risk, which sounds a little scary!

However, risk and return are two sides of a coin and it’s important that you understand them.

The more risky assets (e.g. equities) that your money is exposed to, the more likely you’ll generate higher returns on average over time.

So your asset allocation matters a lot. Broadly speaking, you have to ask yourself:

What percentage of my money is allocated to equities vs bonds and why?

During your wealth accumulation phase, you want more of it allocated to equities within your pension.

But then if you’re someone who cares about where that growth (usually driven by profits) is coming from, then you might want to consider socially responsible investing options.

This has become ever more important in the world that we live in today and for good reason. 

Especially as we do so for our food and clothing, etc. Why not for our money? 🤔

In Conclusion,

Becoming more pension confident begins with truly having a dream and owning it.

Although the future ahead of us all is uncertain, there are things that are within our control and wealth building using a pension is one of them.

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