23rd May 2024
general
But is your pension working as hard for you as it could be? A pension is a very long-term investment which you might hold for 30 years or more. Even 0.5% in extra charges or investment underperformance could cost thousands in terms of your eventual retirement income.
It’s a good idea to review your pension scheme to make sure it’s well-placed to help you achieve your retirement goals. Below, we explain the main features to look for.
Do You Have Any Guaranteed Benefits?
Guarantees are pretty rare these days, but if you have any safeguarded or protected benefits within an existing pension scheme, you should think very carefully before moving it elsewhere.
Defined benefit pensions are the gold standard in retirement benefits. These are mainly available within the public sector, for example, if you work for the NHS or Local Government. Many large companies have closed their schemes, although a number of current and former employees still have preserved benefits. Unlike ‘defined contribution’ pensions, defined benefit pensions provide a retirement income which is based on your earnings and years of service rather than the underlying fund value.
Even if you don’t have a defined benefit pension, you might have some valuable benefits within your existing scheme, for example:
Pensions which provide enhanced benefits are often older-style plans, and might not offer the same flexibility as a more modern scheme. The decision to keep your pension where it is or more it elsewhere will depend on what you want to achieve in retirement.
What Are the Costs?
Costs will have an impact on your eventual retirement pot, and unlike investment performance, we can make a pretty good estimate of what the impact will be.
For example, if you invest £300 per month for 30 years and achieve investment growth of 5% net of charges, you can expect to build up a pot of around £250,000. However, if your costs increase by 0.5%, this could reduce your eventual fund value by around £22,000.
Costs within a pension can include platform or product charges, fund costs, and adviser fees. Investment management fees may also apply if you invest in a managed portfolio. If you have a self-invested personal pension (SIPP) you might pay more if you invest in non-standard assets, such as commercial property.
It’s important to consider which costs can be reduced and which ones offer value. For example, you might be able to reduce your costs, without sacrificing benefits or fund choice, by moving to a new platform.
Financial advice does come at a cost, but an adviser can also guide you on the right investment choice, reduce costs elsewhere and help keep you on track towards your goals.
Are There Enough Funds to Choose From?
Fund choices can range from a handful of default funds to the entire investment universe, encompassing thousands of shares, funds, and investment trusts.
A reasonable choice of investments is vital to make sure your pension fund is well-diversified and aligned with an appropriate level of risk.
You don’t necessarily need thousands of funds to choose from, but the funds you do have access to need to be suitable and provide enough flexibility if your requirements change in the future. Fund choice also needs to be balanced with costs and other features.
What About Retirement Options?
With the introduction of Pension Freedoms in 2015, you can theoretically take your pension benefits in any way you choose. For example:
Not all schemes provide all of these options, particularly if they were set up before 2015. Of course, this doesn’t mean you need to move your pension elsewhere now, as you will still have the option to do this before you retire. However, retirement benefits should form part of the overall picture when reviewing your pensions.
Would the Scheme Provide Death Benefits?
Most pension schemes will provide death benefits for your loved ones.
If you are a member of a defined benefit scheme, this may include a spouse/dependant’s pension and a lump sum based on your salary. Defined contribution schemes, on the other hand, can pay out the full fund value to beneficiaries. This is a key reason why some people look to transfer out of their defined benefit schemes. However, it is also worth considering whether remaining in the scheme and setting up life cover would achieve the same objective.
If you have a defined contribution pension, benefits can be paid out to beneficiaries either as a lump sum, or by moving the plan to beneficiary’s drawdown so that they can draw an income as they wish. The most suitable option will depend on their requirements and tax position.
Again, not all schemes offer the full range of options. It’s worth confirming what is available from the scheme and whether this meets your requirements.
If you would like to review your pension schemes or even clarify the benefits they offer, you may wish to speak to a financial adviser.
Please don’t hesitate to contact a member of the team to find out more about retirement planning.
