It’s time to be brave with your pension savings
When your next annual pension statement arrives in the post, let’s rip open that envelope and get pro-active when it comes to your retirement, writes Peter Ranscombe
Ican still remember queueing up at the post office with my Gran to collect her state pension. It was always on a Thursday and was part of the rhythm of the week – church on a Sunday, bingo on a Tuesday, fish on a Friday.
How times have changed. State pensions are now normally paid directly into people’s bank accounts once every four weeks, which would have left my Gran horrified at the idea she wouldn’t have an excuse to stand in the queue at the post office, nattering away.
State pensions aren’t the only element that’s changed when it comes to saving for retirement. The world of personal pensions has shifted too.
Few employers now offer ‘final salary’ pension schemes, also called ‘defined benefit’ schemes because the money the employee gets when they retire is ‘defined’ – usually as a percentage of their final salary. In a nutshell, final salary pensions have become too expensive to offer.
Instead, most companies now provide workplace pensions that are normally called ‘defined contribution’ schemes, with both employers and employees contributing money to the pension pot. These schemes are also called ‘stakeholder pensions’.
The UK Government introduced ‘auto-enrolment’ in 2012, which meant all employers must offer pensions to the vast majority of their employees. Larger businesses were added to the scheme first, with smaller and smaller companies included in stages until 2018, meaning most members of staff should now be covered, unless they chose to opt out.
People who are self-employed may choose to pay into a personal pension scheme too, either through a stakeholder scheme or a self-invested personal pension, which – as the Ronseal-like name suggests – gives them more choice over how their money is invested. Some will make lump sum payments, while others will squirrel away money each month, depending on their circumstances, with many doing a combination of the two.
What happens at retirement has changed too. In the past, people used their workplace or private pension pot to buy an ‘annuity’ – in effect a guaranteed income for life.
Now, many people choose to ‘drawdown’ all or part of their pension pot instead, taking some of the cash to spend straight away while leaving some invested in the stock market or other investments in the hope that it will continue to grow. People aged 55 can access their pension pots, rising to 57 in 2028.
One thread running throughout the pensions landscape is the need for people to take more of an interest in how they save for their retirement. No matter what stage you’re at – whether you’re in your 20s or 30s and thinking about your pension for the
first time, or in your 40s and 50s and beginning to think about retirement – there are advantages to getting engaged with pensions.
‘Regardless of your age or how far away retirement may be, it is essential to understand and be educated about your pension,’ says Rachel Harte, head of financial planning at Claro Money.
‘Whether you’re starting a new job or have simply never spoken to your employer about pensions, investigate what schemes they have in place and how these work – find out if you are eligible for the pension based on your salary, if you have been or will be auto-enrolled, and whether this pension is flexible when it comes to increasing your contribution. Building your understanding of both the pension schemes available to you, and pensions as a financial concept more generally, will help empower you to make smarter and more conscious financial decisions.’
A good first step is to find out more about your workplace or personal pension plan. When that annual statement lands on your doormat, open it, and find out where your money is invested.
‘When people join a personal pension scheme – whether that’s through auto-enrolment or their own action – their payments are usually placed in a “default” fund,’ explains Adrian Lowery, a personal finance expert at investment platform Bestinvest. ‘That default fund is normally a multi-asset fund that’s designed to suit as many people as possible, which means it’s usually quite cautious.
‘That might not be the best option for you if you’re a younger saver in your 20s or 30s and could take more risk, but if you’re an older saver who’s approaching and will need to access their pension pot soon then it might be taking
“Building your understanding of pension schemes will empower you
too much risk. So, the first step is to look at your default fund and, if it doesn’t suit you, ask your pension provider about the alternative funds they offer.’
Lowery says those choices may include target-date and lifestyle funds, which change the allocation of assets within your pension fund – like stocks and shares, bonds, and other types of investments – so that you take more risk earlier on to try to build up a larger pot, and then less risk as you approach retirement. ‘Care must be taken because you might set a retirement date then retire earlier or later, so you need to regularly review your choices to make sure they still match your needs,’ he adds.
Lowery’s point about regularly monitoring your pension is borne out by a survey by ‘abrdn’, the artist known formerly as Standard Life Aberdeen, which found 48% of people are worried about running out of money during retirement.
‘People are living longer these days, so you could be retired for 25 or 30 years, or even longer, so planning for this eventuality is key to ensuring a comfortable retirement right until the end,’ says Rachael Bell, who runs her own wealth management practice. ‘It’s understandable that retirement is an emotional time because it is such a major life event after working hard for so many decades, and it’s only right that people should be able to enjoy their retirement to the fullest.’
Thinking back to my Gran in that post office pension queue, it’s also important to visit HM Revenue & Customs’ website and type in your national insurance (NI) number to see how big your state pension will be, and whether you could fill-in any missing NI payments from previous years.
‘The state pension is extremely valuable,’ adds Lowery. ‘It’s almost £10,000 a year – to achieve that income through an investment or workplace pension, you’d need a big pot. So, don’t miss out on it.’