How good is your workplace pension?
If you’re employed in the UK (as opposed to self-employed) you should be auto-enrolled into a workplace pension unless you’ve chosen to opt out. But although auto-enrolment is a good thing, it’s not an excuse to sit back and take no further interest in your pension.
Many people I meet have little or no idea about their workplace pension. Many see their workplace pension as “wooden dollars” and therefore do not pay as much attention to their investment as they would a personal pension or ISA.
What is a workplace pension?
Workplace pensions are set up by employers to enable you to save and invest toward retirement. Your employer will enroll you in the workplace pension scheme and pays into it on your behalf.
Furthermore, some workplace pensions are called ‘occupational’, ‘company’ or ‘work-based’ pensions.
Generally, there are two types of workplace pensions:
- Defined benefit pensions
- Defined contribution pensions
Workplace pensions are real money and should be treated as you would any investment. Ignoring your pension could result in, poor performance, too much or too little risk, or could significantly impact your retirement planning efforts.
Worst of all, some people forget about their workplace pension altogether when they change jobs, with their hard-earned money falling into the £19 billion of unclaimed pension pots.
Furthermore, if you don’t save ad invest toward a comfortable retirement, you could find yourself falling into pensioner poverty.
What type of workplace pension do you have?
As a minimum, you should take note of what type of workplace pension you have. There are only two types of workplace pension, so it should be easy; DB – defined benefit and DC, defined contribution.
A DB pension is also known as a final salary and pays you a guaranteed income for life when you retire; often inflation-proofed. Because of these guarantees, defined-benefit pensions are very desirable. This doesn’t mean no attention should be paid to it.
Is your pension fund in default?
One potential downside of defined benefit schemes is that they are costly for employers to run, and may run up deficits. Many DB pension funds are in default. If yours is, your pension benefits could be at risk, so it’s worth knowing.
A defined contribution pension on the other hand is a pot of savings built up over time from contributions you and your employer make. Somewhat easier to understand, these savings are invested in a fund of assets such as equities and bonds whose objective is to grow over time. It is this aspect of pension saving that most people ignore entirely. But there is good reason to pay attention.
- Is a SIPP better than a personal pension?
- Should you invest in a pension or an ISA?
- How much should you pay into your pension?
Are you in the default pension fund?
Your DC workplace pension scheme’s default fund will typically be a one size fits all portfolio of assets trying to suit the needs of all members. In short, it will probably be a fairly blunt instrument – satisfactory for everyone perhaps, but ideal for few.
Yet nearly nine out of 10 people in workplace DC pensions remain in the default fund, a statistic which makes worrying reading.
Recent studies have revealed huge variations between workplace pension default funds, with a whole range of different approaches to structure, risk level and goals, which in turn ‘presents a risk for pension savers.
5 ways to make your workplace pension more relevant to you
The world of pensions and investments can be a minefield for those considering their options. Here are some tips to help you make your workplace pension relevant for you:
- Ask your workplace pension provider for details of their default fund
- Contact an independent financial adviser, and ask them to explain the information you’ve been given, in terms of how the funds are invested and what this means for your money.
- Talk with your adviser about your own financial circumstances, goals and risk appetite, and see how well these align with the strategy of your workplace pension’s fund.
- Some employers will agree to make contributions to a pension you have set up yourself, such as a personal pension. With your adviser you could then choose the most suitable investment strategy for your needs.
- When you have decided on a pension fund, continue to carry out regular checks to ensure that it is delivering what you want.
The one size fits all approach is best avoided. It is very unlikely that a default fund will turn out to be better for you than one tailored to meet your needs, and this can make a significant difference to your income in retirement.
It is time to sit up and take notice.
So, how good is your workplace pension?
We hope you have gained value from this article. If you are planning for retirement and feel you would benefit from some independent pension advice, we have a network of advisers across London and the South of England. Call 020 3740 5856 to schedule a callback.