This week marks the annual Pension Awareness Week, which aims to help you get the most from your pension and understand the different income choices you have.
One common enquiry that we receive is from individuals looking to get a grasp of their pensions. For many of us, pensions are disconnected from our day-to-day personal finances. Yet your pension is a pot of your money, much like the funds you have sat in your personal bank account.
Commonly, as with many things in life, apathy can be the undoing of many retirement plans. And this apathy can come in several different forms:
Default investment pathway
Most workplace pension schemes will invest employees automatically into the default fund. This fund is usually selected by the scheme provider and is often a form of lifestyle strategy. This type of strategy means that changes to the pension investments are automatically made over a period of time. During the early stages, your pension is invested heavily in equities in order to achieve longer term capital growth.
As you approach retirement, the exposure to riskier assets such as equities is gradually reduced; instead investing a greater proportion of the fund into lower risk assets such as fixed interest assets or cash. The theory is that this allows you to lock in any investment growth as you get closer to your retirement, with 25% of your fund in cash (or cash-like investments) to pay the tax-free amount. The rest of the fund will normally be invested in bonds because they can provide some protection against changes in annuity rates.
This type of strategy is good if you:
- do not want to be involved in the management of their pension fund; and
- wish to purchase an annuity on your selected retirement date.
However, since the introduction of pension freedoms, most of us are now choosing not to purchase annuities due to the very low rates being offered, preferring to opt for a drawdown facility instead. This strategy means that you are investing in lower growth areas too soon and risk missing out on the long-term growth you need to maintain an adequate income in retirement.
You might not have to make any changes, but you should check your investment strategy matches what you intend to do.
What kind of world is your pension building?
Workplace default pension funds (including lifestyle strategies) will often invest money on our behalf into ‘traditional’ investments that include oil & gas companies and tobacco. Traditional investments don’t usually consider the carbon footprint of the underlying companies or the governance of the business and its supply chain.
Whilst opportunities to invest in ethical, ESG or Positive Impact portfolios are increasingly available on the wider market, workplace pensions remain behind the curve. Ethical funds are now being offered using a negative screening approach. However, very few offer funds which take things a step further with the aim of having a positive impact on society or the environment.
Times are certainly changing – Make My Money Matter, is a new campaign calling for the trillions invested through our pensions to help build a better world. The idea behind the campaign is simple – we can use the £3 trillion invested in UK pensions to create a better environment and society. Maybe it’s time to check where your pension is invested?
Don’t forget to check charges
Like most products and services, pension plans come with charges. All auto-enrolment workplace schemes cap charges at 0.75% but additional fees can apply if you’ve chosen to invest in funds other than the default strategy.
These charges can have a significant impact on the amount we end up with at retirement, so it’s vital to get to grips with exactly how much you’re paying and what you are paying for.
If you’re not sure what charges you’re paying check your latest annual pension statement or contact your pension provider and ask them what your annual charges are.
Taking a more proactive approach
Time goes by much quicker than you think. If you’d like to discuss your retirement plans or want to look closer at how your pensions are invested, we offer a free initial consultation by video call or phone.