'Help - my Mum's asked me (aged 23) for pensions advice' 

Senior woman and adult daughter drinking coffee on porch

For those facing retirement with modest pension pots, the cost of getting help and advice can be prohibitive, leaving many stranded to make potentially life-changing financial decisions alone.

Someone aged 65 can expect to live for 20 years, and the range of options available is constantly expanding.

This presents a frightening challenge for many.

Recent years have seen increased pension flexibility, in part from the launch of pension freedoms in 2015 that means there is no compulsion to buy an annuity and money can remain invested.

This has been matched by growing complexity and a greater risk of making mistakes.

Dismal annuity rates are also pushing many toward self-managing their funds in retirement.

Without any financial expertise, deciphering a course of action is daunting. Professional advice is the answer for many.

But it can easily cost thousands (see bottom) which makes it hard to stomach for those with smaller amounts.

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Many instead turn to their friends and family for help – some even hand their cash over to be run for them.

This has created an army of unqualified “financial advisers” across Britain, with varying levels of success.

This is a situation I have found myself in.

My mother and stepfather are approaching retirement and, as someone who writes about money for a living, my mother has asked me for help.

Sheena Prenter, my mother, turns 52 this year and will be semi-retiring at 55.

She has been a nurse for the NHS since she was 18 and can claim a “defined benefit” pension at the age of 55 estimated to pay £15,000 a year, linked to inflation. She will also be able to claim a full state pension.

Her NHS pension comes with a sizeable lump sum upfront, which when combined with cash savings gives them a pot equivalent to two years’ of her current annual salary.

Ross Prenter, my stepfather, is 65 and already receiving his partial state pension. He has been self-employed in property maintenance for the past 20 years, but also receives a £90 monthly pension payment from his time working in a foundry.

When my mother hits 55 they plan to sell their mortgage-free two-bedroom property in Buckinghamshire and move to Ireland where she grew up – and where their money will go a lot further.

Mum will carry on working part-time and my stepfather will enjoy a well-deserved retirement.

Thanks to the defined benefit pension, their income is largely secure. But with my mother in particular facing the prospect of 30 years or more in retirement, making sure their cash savings and pension lump sum don’t get eaten by inflation is crucial.

Tips for managing your pension before retirement 02:25

“The cash is so we can enjoy a good standard of life in Ireland – we don’t need big holidays or anything like that, but want to be comfortable,” she said.

There are places I have been able to help, moving money out of a bank account paying a derisory rate and into the best possible fixed-rate Isas and bonds, and making sure my mother has had the numbers run on numerous pension scenarios.

But it has become apparent that I do not have many of the answers.

With a long time horizon, the stock market makes sense as a home for at least some of their savings – but it’s not something they’ve ever considered.

My first conversation with her about how investing works and the kind of investment funds that might be suitable appeared to go well. 

She understood that ups and downs were to be expected, the need for a long-term view and the advantages over cash in the long run. 

But a few days later I got a text that sends me into a minor panic, including the line: “There’s an awful lot of small investment firms out there promising high interest rates.” 

After making sure she knows that most of these firms cannot be trusted, her response was that they would stick to cash accounts – back to square one. 

If they are going to invest, it needs to be their choice.

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As Adrian Lowcock, investment director at Architas, said: “I know that cash doesn’t beat inflation, but some people aren’t comfortable investing so your parents need to be really happy to put money in the stock market. Any money invested would need to be tied up for at least the next five years.”

  Philippa Gee, managing director of Philippa Gee Wealth Management, said there were a number of options for what remained of the lump sum after they made the move to Ireland. 

“They could invest for the long-term without touching it; cream off the profits every year as an income while maintaining the capital value; or take a higher income and not worry about the capital value going down over time,” she said.

  Having looked at their finances, Ms Gee said there was a “disproportionate amount in cash”.

“Depending on the level of risk they feel comfortable with, it seems sensible to invest the majority of the pension lump sum, and make plans for the cash accounts as and when they mature,” she added.

In particular, she recommended my mother put more of the money in her Isa allowance, which is £20,000 per person for the current tax year.

She recommended buying the income units of some funds, which give investors a regular payout. 

Explaining stocks and shares investment 01:59

If investing £45,000, Ms Gee recommended putting £10,000 in L&G Multi-Index Income 4, which yields 2.9pc and has a 0.35pc charge and £10,000 in MI Miton Cautious Monthly Income, which, as the name suggests, issues a monthly payout. The current yield is 3.5pc and it has a 0.86pc charge. 

Another £10,000 should be put in 7IM Personal Injury, with a lower 1.9pc yield and 0.69pc charge, and the same amount in low-cost fund Vanguard Lifestrategy 40. This is a simple, all-in-one fund with 60pc in bonds and 40pc in shares. The charge is 0.22pc.

The remaining £5,000 should go to Trojan Income, with a 3.6pc yield, and higher 1.02pc charge.

Mr Lowcock agreed my parents should focus on income-producing funds.

“Income is what they will need in retirement, and any income produced from the investments could either be re-invested or used to add to cash savings," he said. 

"If re-investing, the benefits of compounding will only really become clear over 10 years or more. A 50/50 split between income funds and growth funds would achieve good diversification and keep things simple.”

He also recommended Vanguard LifeStrategy, but the version with 20pc in shares, as the growth fund. For the income fund, he suggests Fidelity Multi-Asset Income. It aims for a 4-6pc yield, and invests in a mixture of bonds, shares and other areas such as infrastructure funds. The charge is 1.13pc. 

How much does financial advice cost:

There are two things to consider when it comes to deciding if financial advice is worth it: how much it will cost, and what it can deliver in return.

Spending £2,000 on advice is likely worth it if it generates £50,000 in additional investment growth.

According to advice finder service Unbiased, these are some of the key costs:

  •  Initial financial review: £500
  •  Investment strategy for a £50,000 lump sum: £1,500
  •  Advice at retirement for someone with a £200,000 self-invested personal pension, £100,000 investments, a £250,000 investment property and some other pension income, including estate planning: £5,000

This article was written by James Connington from The Telegraph and was legally licensed through the NewsCred publisher network. Please direct all licensing questions to legal@newscred.com.