Tips from Davidson Asset Management
Make your pension work for you
7th December 2020, 9:24 am
How well do you know your pension? Here are some Top Tips on how to make your pension work for you.
- Find out what pensions you hold from previous employments
Over the course of most people’s lives and with the introduction of auto enrolment, many people have ended up with various pension pots that could have substantial sums in them and subject to no restrictions and may wish to consider consolidating these into one pension plan. However, it is important to note that not all pension plans can be transferred and some may incur additional costs/ result in the loss of potentially valuable guarantees so it is important to review this first.
- Find out what Group pension plan your employer is in and what funds are held in your plan
Often employees are not aware of the details as to where their money is being invested, the provider they are with and the funds they are invested in. It may be that you are in your employer’s default fund – which is automatically selected if you do not otherwise specify a particular investment strategy. Is this fund suitable? Or would you prefer to explore alternative funds that align with your individual goals and attitude to risk? With yourself and your employer paying into this on a monthly basis (with minimum auto enrolment contributions currently 3% employer and 5% employee) your pot can build up to a significant value up over time so it is important you are making the fund work as well as possible for you.
- Make sure you have an annual valuation so you know how much is in your fund
Do you know the value of your pension? Make sure that you are receiving as a minimum an annual valuation or access on line where you can check the value of your pension on a more regular basis. After all, your pension is likely to form a large part of your future income. It is also important to remember that the value can go up or down depending on how markets are performing and the funds you are invested in.
- Check the performance of your pension funds against the industry benchmark for 1, 3 and 5 previous years
Do you know how your funds have performed over the past 5 years? There is always a benchmark to gauge the performance of your funds, this could be for example the FTSE 100, FTSE 250 (if you are invested in UK equities) or the S&P 500 (if you are invested in US equities). Corporate bonds and Government bonds can also be benchmarked. This may help you to provide confidence that your funds are working well and providing returns in line with expectations or identify any fund changes that may be required if it is performing poorly in comparison to the relevant benchmark.
- Don’t hesitate to seek independent financial advice on the performance of your pension fund
Sometimes just because we see our valuations increase, we think that things are ok even though the key indices have increased by a much greater amount. This should be challenged and not just accepted. It may be useful to seek an independent opinion from a qualified advisor who can offer an overview of how your fund is performing, and possibly advise on alternative funds that could be better suited for you. Please note, independent financial advice is likely to incur an additional cost.
- Have a retirement plan in terms of age and date that you would like to retire
You are never too young to have a retirement plan – if you set a date for retirement you at least know how many years you have in order to grow your pension. In line with current Government legislation, you can access your pension at 55 and typically 25% is tax free either as a lump sum or for future drawdown. If you are married with family it makes sense to discuss this so you both share the same vision of when retirement may be.
- Do you utilise Cash flow for planning to determine what your pension may be worth at your retirement date?
Using sophisticated pension projections can help to give you an idea of how much your pot may be worth in the future, based on a set of assumptions ie, level of investment growth and contribution amounts. This can help to determine whether or not you may have enough to meet your retirement goals, which can allow you to make more informed decisions regarding contributions, fund choice etc. It is worth noting that they are based on a range of assumptions, which you should be aware of as with any pension projections.
- Have a plan for what retirement may look like for you and your family so you know what Financial goal you need to reach
It is surprising how little you may need in retirement if all your debts are paid and no further commitments exist. It may be simply a case of walking with the dog and enjoying your freedom or it may be a world trip and a more extravagant lifestyle. Record what you spend today and what you believe you will spend in retirement, you will be surprised, a good quality of life in retirement is what we all strive for.
- Obtain a free valuation for your state pension so you know how much and when
The State Pension is a regular payment from the Government that most people can claim when they reach State Pension age. The form can be completed online and will provide you with a projection of how much your state pension will be worth and when you can access it. This can help to provide a good base income for retirement. However, the state pension age of retirement has moved out further over the years, only serving to increase the importance and value of private pensions.
The information I have included in this document is for informative purposes only and should not be construed as advice. Please contact DAM directly to speak with the one of the teams qualified financial advisors if you would like further guidance or specific advice based on the implications of your personal circumstances.