This article outlines some practical steps that virtually everyone should consider regarding their pensions. It will particularly useful for those who are relatively high earners and/or those who are approaching retirement with a sizeable pension pot.
It is not intended to be financial advice specific to your unique circumstances.
Consider combining your pensions - if you have more than one.
If you’ve changed employers during your career and you did not move your pension with you then you likely have at least one pension that is not tied to your current employer. That isn’t necessarily a bad thing, but it can be administratively annoying and, crucially, you don’t want to lose track of any pensions as you get older. Moving your previous pension(s) into your current pension scheme is usually quite painless and often results in the charges you pay declining (though that’s not always the case; if your current pension is more expensive than your previous pension - or the investment options are poorer - it can be a good idea to keep them separate).
Try to maximise your employer's contributions.
Some employers offer generous 'matching' contributions, which means that if you contribute, say, 5% of your salary to your pension then your employer would contribute the same amount. This matching is great: it is literally a doubling of your money on day 1. No other investment can come close to guaranteeing that sort of return. To the extent that you can afford to do so, it usually makes sense to contribute at least as much into your pension as your employer will match. In some circumstances it can be a good idea even if doing so puts you over the 'annual allowance' (this is mainly relevant for higher earners who are hit by a reduced annual allowance and have income well in excess of their living costs; you can read more here).
Ensure your Statement of Wishes is accurate.
Your 'Statement of Wishes' tells the pension provider to whom you want your pension to go to if you pass away. You probably only completed this form when you started saving into your pension. Have your circumstances changed since then? For example, if you have married or divorced you may wish to change your Statement of Wishes.
"Save The Raise" (or save what was formerly the school fees...).
"Save The Raise" is when you get a raise and tell your employer to direct it into your pension rather than into your current account. While clearly not an option for everyone, it can be a good principle to try to adhere to.
Perhaps of more interest for people who have children finishing school and fleeing the nest, you could divert into your pension the money that was previously used to pay school fees and other costs associated with your children. This can help ensure a robust retirement and is usually highly tax efficient (especially as pensions are not subject to inheritance tax).
Consider how your pension is invested.
Often the 'default' option is not the most appropriate choice. One common flaw is that the default option invests in a relatively high proportion of bonds or other funds such as property funds. That's often not a good idea for someone who doesn't intend to take money from their pension for a long time. The effect of this on the long term value of a pension can be absolutely huge. It's well worth getting the investment mix correct.
It's worth noting that even people approaching retirement may not want to access their pension for many years. The default option can be a particularly poor choice for such people as most default options invest in a greater proportion of bonds as someone ages. This can be inappropriate if the person does not need to rely on income from their pension in retirement, especially as pensions are generally not subject to inheritance tax.
Can we help?
The rules concerning pensions are complex but the complexity presents an opportunity to make decisions that can materially reduce the amount of tax you pay. This is particularly true for those with a relatively high income and who are able to save more than they earn. Additionally, the investments within pensions can often be optimised for your unique circumstances rather than simply accepting the pension provider's 'default' assumption.
As part of our overall financial planning service - which costs a minimum of £2,400 - we advise you on both the contributions to your pension as well as the investments within it. Use the form below or reach out to Scott Tindle, CFA directly at firstname.lastname@example.org if you would like to learn more.