Is Your Pension Working for You?

Thanks to autoenrollment in pensions, all workers are now placed into a work pension scheme. Although these are designed to help us save for retirement, some of us can turn a blind eye to this investment until our retirement comes around. Yet this can be costing us the opportunity to make the most money possible from our savings. So what steps should you be taking?

This week, we’re showing you how to understand what your pension scheme is doing, how to be proactive with your investments and be assured you’re getting the most out of your money. Let’s get started…

Default pension schemes – are they so bad?

If your money is in a default pension scheme, this can be both good and bad. For most people, between 80-90% of their pension goes into an investment chosen by their employer. As they don’t want the threat of big losses, employers will stick with a solid investment strategy that will apply to all staff. In addition, you’ll see your money being gradually moved into lower and lower risk funds. Around 10 years before you reach pension age, almost all of your money will be in lower-risk bonds.

The benefit of this is that you will be assured that you will receive a decent – and almost certainly safe- pension at the end of your working life.

However, this scheme does carry some risks too. Although the amount will be stable, it may not be the best amount you could have received had you been more proactive earlier on. These safer schemes are unlikely to yield as big result than if you had included higher-risk options in your portfolio or even diversified. You may find that when you retire, you’ll have a smaller amount than someone who invested the same amount but in different schemes if you stick with the default option.

How do I know if my default scheme is working?

The first step you need to take is learning as much as you can about your default pension scheme. The best person to go to about this is usually your employer or a pensions department within your company, as they will have picked the scheme. You can also phone your pensions provider. These will help you get access to your online pension account.

This online pension account will list the funds or funds you are in, as well as the other ones available for your pension scheme. Clicking on these fund names will give you more detailed information, including fund factsheets, historical performance, the top 10 holdings in a fund and a rating of its riskiness.

Using this information, you’ll be able to judge whether your scheme is what you want and you have the option to change them if you want.

What should I look out for?

There are 6 factors you need to look out for to see if your pension is working for you.

  • Diversity: Have a look at where your investments are. Some may be global investments, while some may be country based, such as only in the UK. You’ll want a good mix of geographical locations should one market go under. As well, you’ll want a variety of assets. While emerging markets are the riskiest option, they offer the highest opportunity for growth. It’s good to balance these out with a few safe choices, so you’re not talking too big a risk but can still reap the rewards.
  • Cost: Know how much your fund costs. Each one may offer charges, including administration, dealing and other costs.
  • Risks: You’ll always need to be aware of the risks you’re taking in each investment. Your pension provider will usually put each investment into a band for risk. These can be as basic as low, medium and high risk. Look out for these and try to have a good balance of these. If you are young, it may be worth taking on more high-risk funds now. This means you will see a greater return if successful and have time to recover if they’re unsuccessful.
  • Performance: Always keep an eye on your schemes. Markets change constantly, so you need to be aware of what’s happening. It is no use to set up your scheme and leave it unattended. Good monitoring can lead to greater returns in the long run.
  • Turnover: This can be found in your fund documents and tells you how much buying and selling the funds are doing. This is only applicable if there is an active manager for the fund. Turnover of 20-30% is low, 50 % is okay, but anything higher than 50% tells you the manager is buying and selling for the short term.
  • Objective: This will tell you how aggressive your fund is. Through finding this out, you’ll be able to see what that fund is trying to achieve, whether quick turn over for smaller but quickly achieved profits or long-term higher growth. This will help you see if your goals are in line with your funds. For example, someone later in life may be more interested in short-term gains, while younger investors may be after sustained growth.

Before you make any big decisions with your pension, we recommend contacting a professional financial adviser for personal and tailored advice.

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What Steps Should You Take When Investing Your Pension?

Investing your pension pot is a great idea. If done well, it can mean that the amount you save towards your pension is healthily supplemented and has a better chance at lasting for the entirety of your retirement. While many of us want to do this, it can be confusing to know where to start. From choosing your scheme to maintaining it, there’s a lot to consider to make sure that we’re getting the most out of our pension. Here are some top tips to get you started…

How to choose your product

When you’re selecting the scheme you want to invest in, make sure you understand what is available to you. One option is an income drawdown scheme. This allows you to take out some of your pension while the rest remains invested. In the simplest of forms, this is an investment portfolio that allows you to withdraw an income to live on. You’ll need to plan out your money well with these schemes, to ensure money doesn’t run out before you die.

Another option is to buy a fixed-term annuity. This is a short-term investment product that allows you to let someone else make the decision as to how you fund retirement, or even delay when the decision is made. The length of the term can vary but it is often two, three or four years. The  advantage is that you can’t alter them, like a regular annuity which lasts the rest of your life.

How much should you take?

Should you take out a drawdown scheme, you’ll need to carefully consider the amount you want to take out as income. Although you can expect to add to the amount, through good investments and interest, you’ll still need to ensure that there is enough money to last you. A good rule of thumb is to allow yourself around 3.5 to 4% per year of your total amount. Using this model, you’ll need to work out how much you need to live off a year and use this as a guide for understanding the figure you need to save.

For example, if you need £12,000 a year and take this as 4% of your total amount, you’ll need to save around £300,000 to be able to do this.

You should also be aware that the amount in a drawdown scheme can decrease as well as increase. This means that you may have to reduce the amount you take as income or save more if you want your money to last.

How to minimise your risk

As your investments can go up and down, its best to spread your assets to decrease the amount of risk you are taking. There are several great options available that will allow you to spread your investments, while still giving you good returns on investment. Shares, corporate and government bonds, cash, commercial property and more complicated investments like private equity and hedge funds, or absolute return funds, are some options you can take.

While diversifying your investments doesn’t eliminate all risks, it does help to minimise any damage done should one of your investments tank.

How to review your investments

No matter how strong the investments are, you should constantly evaluate their performance. It’s no use setting up your pension scheme and then leaving it until you retire. Experts recommend that you should check your investments at regular intervals, such as once a year. It’s a good idea to always do these checks at the same time every year so you can make a year-on-year comparison.

While it’s important to check up on your investments, don’t do it too often or you risk being too tempted to make lots of small changes which can rack up extra charges.

Before investing your pension or making any major changes to your scheme, it’s a good idea to consult a professional financial adviser. This will give you personally tailored advice, designed to give you the most out of your pension.

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