Don’t neglect old pensions: tips to get yours into shape
Providing for a comfortable retirement is among most investors’ chief long-term objectives. Yet personal pensions are often neglected, left to drift along without being reviewed.
Here are five steps to get your pension in shape to help meet your retirement goals:
Ensure you maximise employer contributions
At risk of stating the obvious, what you can draw from your pension depends on how much you put in. If you are employed, saving the amount to your employer’s scheme to attract your employer’s highest level of contributions is a simple way to make efficient use of your money. You may of course have to save even more to meet your retirement objectives but you should at least try to do this.
Check you are on track to meet your goals
Pension calculators (such as this one on the Money Advice Service website are a useful means of working out how much income you might generate in retirement. The calculation is based on your level of contributions and how much you have accumulated so far. The calculator makes certain assumptions about investment returns, inflation and other factors, so it can only give you a feel for whether you are saving enough to meet your retirement goals. The result, however, could alert you to a possible shortfall and allow you to better plan your pension arrangements.
Scrutinise your choice of asset classes
If you are still some way from retirement (say over a decade), you may wish to take on a higher level of risk with your pension fund in order to maximise the potential for returns. Over many years the bumpy ride provided by the stock market tends to be less significant than the overall level of return it provides, so although investing here carries more risk than lower risk asset classes such as cash or bonds, having too little in equities – in other words being too cautious – could drag back your investment performance and hinder your ability to meet your retirement objectives. If you are closer to drawing benefits from your pension, then you may wish to reduce the volatility of your pot by using a mix of assets. This could include lower risk areas such as bonds.
Examine your fund choices
Once you have established your desired mix of assets in your personal pensions, take a look into your fund choices to ensure they meet your needs and whether you are getting value for money. Fund charges can eat into your investment performance so the use of low-cost passive funds or ‘trackers’ that aim to follow market indices could help minimise this effect. Another route is aiming to pick funds with a reasonable chance of long term outperformance. ‘Active’ funds try to beat their benchmarks, though there are no guarantees they will do so and they often come with higher charges than passive funds.
Take a look at your pension charges
Charges on pensions vary. Older schemes in particular may be expensive compared with competitive modern ones. However, before you transfer pensions with the aim of reducing annual charges, you should look into any transfer costs or penalties involved and whether you would lose any guarantees or other valuable benefits.
Rob Morgan is a pensions and investments analyst at Charles Stanley