Take control of your pension, don't ignore it!
Tuesday, 11 October 2011 01:47
By Kate Saines
Ignorance is bliss, goes the old saying. But when it comes to your pension, overlooking the finer details could mean a rather less than blissful retirement.
Far too many of us, the statistics say, are stalling when it comes to taking out a pension.
But many of us who have gone to the trouble of investing our hard-earned pennies into a pension pot are also being slapdash when it comes to maintaining and keeping on top of the schemes.
A recent investigation uncovered evidence 18.5 million people have never proactively changed their pensions and the risk profile of the investment within their pension.
Most worrying, said Barings Asset Management, which conducted the study, was the fact so many people approaching retirement had never made a change to their pension pot.
Fifty per cent of those aged between 55 and 64, and 40 per cent of the 65 plus age range had not made any alterations.
And this is the age when you really need to be on the ball when it comes to your pension, as Richard Brand, a financial adviser at Eos Wealth Management explained.
“Failure to monitor and review your pensions could have a significant impact on the income you receive in retirement,” he said.
“The level of risk you may be prepared to take when starting to build your pension fund is dramatically different to that when you are approaching retirement.”
As a result you will need to consider the underlying investments in your pension. And you must be aware that different funds produce different returns, so investment in a poorly-performing fund will have an adverse effect on the value of your policy.
The problem is, as Baring’s research has highlighted, 8.3 million people were unaware of the level of risk involved with investments, including pensions, despite the significant role they play in providing for their retirement.
Even during these times of financial turmoil and volatile markets people were still overlooking the nuts and bolts of the investment that would be producing their future income.
Marino Valensise, chief investment officer at Barings, said: “With so few people taking an active role in understanding the terms and conditions of their investments, many are likely to be disappointed when they reach retirement.”
He added: “Quite simply, not enough people are checking the risk profile of their pension and investments and large proportion of those that do, aren’t doing it regularly enough.”
Use the Myfinances.co.uk comparison tables to find the best deal on a pension or annuity.
The consequences of not having a big enough pension pot can be a lot more disastrous than we might imagine.
In our 30s and 40s we might like to dream our ideal lifestyle in retirement will include long holidays, spoiling the grandchildren and pursuing interesting hobbies.
But there are more practical and essential situations we may have to pay for, and not having enough money for these could be very stressful.
To illustrate this point, Dr Ros Altmann, director general of over-50s group Saga, said around 80 per cent of people had no idea how much they will have to pay for care. And, she said, around half think long-term care is free at the point of use.
“But today’s average pension pot,” she continued, “will fall short of funding long-term care costs for one in four of us who will need it.”
It’s a sobering thought, but one which provides a strong incentive to get on top of our pension. So what should we be doing to ensure our pension is working well for us? It’s best to start with the basics.
Richard Brand said firstly you need to know what pensions you have, what company your policy is held with and where your money is actually invested.
From this point you must get an up-to-date valuation and review how the underlying funds have performed relative to their benchmarks. A professional financial adviser should be able to help with this process.
Reviewing your pension is not a job to be taken lightly. As such it needs doing at least once a year.
If you fear you might forget, Richard Brand advises: “Your annual statement should be a reminder and not just put in the filing cabinet!”
If you are part of an occupational pension scheme you are not excluded from this. Many of these schemes allow the holder to make decisions on investments.
And the advice is, every time you get pay rise you should also increase your pension contribution. Experts advise you should aim to create a pension pot which provides you with the equivalent of half to two-thirds what you are earning in employment. So, ensuring you are paying enough in contributions is essential when reviewing your pension.
Private pensions and Self Invested Personal Pensions (Sipps) provide a lot more flexibility and allow you to have more input than occupational schemes. But if you are considering taking this step, Mr Brand warns you should think carefully.
“Every pension transfer needs to be considered on its individual merits,” he said. “There is no ‘best time’ to do this and it is extremely important that proper analysis be done to consider the relative merits of transferring your pension.”
Be careful when transferring benefits from an occupational scheme to a personal plan. This is because benefits might, in some circumstances, be more valuable if retained in their existing schemes.
So what if you are reading this, feeling a wave of anxiety flowing over you because you do not yet have any kind of pension scheme at all?
The good news is it’s never too late to start a pension – in fact any expert you speak to will say it’s better to open one – albeit further down the line than advised - than not to have one at all.
But if you have put it off until now – don’t waste any time setting one up because the sooner you start, the quicker your pension pot will build up.
To achieve a modest pension income of £10,000 annually you would need to start saving £1,377 per year from the age of 20 according to figures compiled by Scott Wakeling, a consultant at Mattioli Woods, a pensions and wealth management consultancy.
Put this off until 30 and you will need to be putting away £2,263. Anyone starting a pension at 40 will need to put away £4,002. And leaving it until 50 will mean stashing £8,323 a year into your pension.
Richard Brand said: “The key areas to consider are how much you can afford to put aside for your long term savings, how long you have until retirement, the income you wish to have at retirement, the level of risk you are prepared to take and the costs charged by your pension provider.”
Richard Brand’s Pension Review Checklist
1. Get an updated valuation
2. Check the performance of your funds
3. Review the level of risk that you are currently taking against that which you are comfortable with
4. Review the projected value at retirement
5. Consider if you need to increase your contributions
Use the Myfinances.co.uk comparison tables to find the best deal on a pension or annuity.
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