Pensions knowledge gap
MILLIONS of us say our pensions remain a mystery, with one in three savers not realising their money is invested in the stock market and other potentially volatile assets, such as property.
Many will have been shocked to see the value of their pension funds fall during the pandemic, as they did not know the risks they were taking on. Nearly three quarters have made no changes to their pension in the wake of Covid- 19, with many saying they would not know where to begin, according to research from Teamspirit. Managing director Adam Smith said this points to a gaping pensions knowledge gap: “How can we expect people to check, monitor and engage with their pensions when they don’t know how to do it?”
Separate research from Royal London shows that half of pension holders have never looked at where their contributions are invested. Andrew Tully, technical director at Canada Life, said pensions are usually invested in a combination of shares, bonds, property and cash, both in the UK and worldwide: “You should never put all your eggs in one basket, it makes sense to spread your money around.”
He said you need to work out how much risk you are taking with your money, checking what your pension invests in or asking an advisor to do it: “The higher the risks the more your pension may grow, but with a greater chance of making a loss.”
Tully said pensions are a long- term investment and you need some stock market exposure, despite the risks: “Cash is relatively safe but returns are low, especially today, and likely to be eaten away by charges.”
People who join their employer’s auto- enrolment pension scheme are usually invested in a default fund unless they choose otherwise: “This may not be the best option for everyone, so check.”
Tully said consolidating your various pensions into one could make it easier to manage your investments.
He also said to check whether your pension plan operates a “lifestyle strategy”, automatically moving your money into low- risk investments in the final years before retirement: “That may be outdated now as under pension freedoms many people stay invested in shares, using drawdown after they retire.”
If you have a final salary pension you are fortunate as there are no investment choices to make, he said.
Stephen Lowe, director at retirement specialist Just Group, said pensions are usually set up to work for savers, even if they do not pay attention to where their money is invested: “The money should still be well stewarded and costs controlled.”
He said you need to be engaged when setting up your pension, to work out if you are contributing enough, and where it is going.
“Check your annual statements to make sure performance is on track and you have set the right level of investment risk,” he said.
You also need to pay attention to all pensions after you move jobs. Lowe added: “If you transfer your pension, this must be done for the right reasons, so seek professional help to avoid scams or other mishaps.”