You’ve enrolled in your workplace pension: what next?
If you have decided to join your workplace pension or auto-enrolment scheme, then you’ve taken the first steps towards building a healthy nest egg for your retirement. Great news.
The bad news is you risk falling into the category of savers who join a pension scheme, select the default fund, and then promptly forget all about it.
That could be a costly mistake.
A pension should be like a car; something that undergoes a service at least once a year.
If you forget about it, your money could end up sitting in a poor performing default fund for years, with punitive fees eating away at your returns.
That’s why enrolling is just the first step.
There are three main areas to consider once you’ve been auto-enrolled: making pension contributions, choosing investments and administering your pension.
Making pension contributions
While auto-enrolment has seen 26,000 employers enrol more than 6.7 million staff into a workplace pension, according to the Pensions Regulator, there are still issues with the scheme, namely with minimum contribution levels.
This is the minimum amount you and your employer must pay-in to your pension. Consensus among experts is these levels (currently 2% but going up to 8% in 2019) are too low to provide savers with a comfortable retirement – even when they increase to the higher limit.
Research by insurer Royal London found someone on average earnings who was looking to achieve a pension of two thirds of their pre-retirement income with inflation protection and provision for a surviving spouse, would need to work to 77 if they only contributed the statutory minimum.
Think about whether you can increase your contributions. Remember, the figures above are the minimum.
“Too many employees fail to take up the full entitlement of employer contributions, so effectively forgo free money,” says Nathan Long, a senior pension analyst at Hargreaves Lansdown.
Being clued up about where your money is invested is vital. Investing differently to your scheme’s default fund can lead to superior returns, according to number crunching by Hargreaves Lansdown.
Analysis of its workplace savings platform found 8 out of the top 10 funds chosen by members outperformed the average managed fund and the top 10 fund picks returned on average 3.01% per annum more than the average managed fund (over 5 years).
Long says: “Default funds are a one-size fits all approach to investment, so quite simply cannot be right for everyone. Changing your investments to suit your own objectives and attitude to investing can generate superior returns and have your money put to work harder for you.”
When it comes to picking funds, your tolerance to risk should be top priority. For more, read: Five steps to build a successful investment portfolio
Administering your pension
Find out how you can keep an eye on the performance of your pension. Registering for online access allows you to quickly check how your pension is coming along. Some workplace pensions offer mobile or tablet apps so check to see what’s available.
One question that is rarely asked, according to Long, is what happens to my pension when I die?
“In most cases you will be able to nominate who you would like to benefit in the event of your death which will ensure your intentions are made clear to the Trustees should the worst happen,” he says.