When considering financial security, our first thoughts might fall to the amount we’re contributing towards our pensions now or what we’ve put away for when we decide to retire. For some of us it could be a definitive level of wealth we’d like to accumulate to feel comfortable and secure in the future.
Generally we’re living longer, more active lives than ever before. Retirement isn’t what it was a generation ago. As a society it feels like there are fewer boundaries around what retirement should look like for each of us, which can only be a good thing. However you choose to spend your time once you’ve left the 9 to 5 behind, your pensions are likely to be a fundamental part of your plans.
It’s never too early to start saving for your future. That’s something most of us agree on – and as private pensions are no longer a luxury, they’re likely to play a leading role in financing your future.
Over your career you’ve probably worked for a number of different employers and amassed a number of different pension pots here and there. If you’ve been self-employed at any point, you may also have invested in a personal pension, or SIPP (Self-Invested Personal Pension) as they are often known.
Holding a number of pensions from past employment can definitely help you to feel more confident and secure about the future. But when it comes to your financial security, is it simply a case of ‘the more the merrier’? It could well be. However, it’s worth knowing the ‘ins and outs’ of each pension you hold to help you decide.
Getting to know your pensions
While it definitely feels good to know you’ve put enough money away for a comfortable retirement, it’s not just the number of pensions you hold or the value of those pots combined that’s important. You might receive regular statements that keep you up to date with their value and what that means as a future income. But what else do we need to know? Here are some considerations to help you make sure your finances are in good shape – and they might even save you some money too.
As with any investment in the stockmarket, it’s important to remember that the value and income from a fund’s assets will go down as well as up. This will cause the value of your investment to fall as well as rise and you may get back less than you originally invested.
- Are your pensions exposed to the right amount of risk?
It’s important to understand how your pensions are invested to make sure they’re exposed to the right amount of risk for your life stage and plans for the future. For example, if you’re approaching the date when you expect to retire, you might want to know whether or not your pensions are invested in more volatile or higher-risk assets like equities (shares in a company). If it is, you run the risk of experiencing greater losses when markets/sectors suffer a downturn, compared to other lower-risk, less volatile assets like bonds.
While all investments will go down as well as up by their very nature, you don’t want to leave yourself too little time to recoup any losses to your pensions before you retire. So if you believe your pensions and other retirement savings are exposed to more risk than you are comfortable with taking, it makes sense to look into what other providers can offer in terms of lower-risk alternatives to help preserve your wealth for the future.
- Check how much you’re being charged
All pension plans come with charges, but the fee structure and the amount you pay will vary between providers. It’s important to understand how much you’re paying as these charges can make a serious dent in your pension’s value over time.
Some providers roll all of your charges up into one simple annual management fee. Others will charge separate fees for different services, like service or policy fees, contribution fees, platform fees and some might even apply an inactivity fee – a charge that’s incurred when you stop paying into your pension. What you pay will depend on your individual plan, so it’s worth asking your provider(s) to clarify all your charges if they’re not clear from the information they provide.
If you want to make it easier to keep on top of what you’re being charged, it might be worth thinking about moving your pensions to a provider that offers one clear and transparent annual management fee. By their very nature, annual charges could help you compare the costs of different products and providers more easily. They might also make it easier to evaluate your pensions’ overall performance (their net value after charges are taken) which in turn can give you more control over your money. But as always, beware of the small print. Some providers might still charge an exit fee when you move your pension elsewhere. Also, consider if any death benefits or any guarantees are already in place when thinking of moving. So it’s worth checking with your current provider about that too.
- Are there lower-cost pensions out there?
In short yes, there definitely could be. If you have pensions worth £30,000, £50,000 and £70,000 all charged at different rates, for example, you might be paying higher fees than you need to. It’s definitely worth shopping around online or speaking with a financial adviser.
Some providers offer tiered charging structures when it comes to pensions, so the more you invest with them, the lower their charges will be. These will of course vary depending on who you choose, but it could be worth doing the sums to work out what you could save by getting your pensions together under one roof.
After all, while the percentages involved might seem relatively small, even saving just 0.75% on a £70,000 pension could still save you somewhere in the region of £500 each year. And of course, any growth your investment achieves could help you move towards the next lower-charging tier too. But as already mentioned, remember to factor in any exit charges or other fees on the potential savings you might make, if your plans still carry them.
- Keep things simple
If you’ve looked into the nuts and bolts of your pension pots recently you’ve likely experienced the time it takes to keep on top of what you’ve put away. Multiple pension pots with different providers can be a real headache; navigating the details of each plan and waiting for phone calls to be returned can defeat the object - saving for your retirement should bring peace of mind, not more problems.
So what are the alternatives? As we’ve already mentioned, you could consider consolidating several pensions by moving them to one experienced provider. Fewer websites and contact centres to deal with can only be a good thing. There are also pension providers out there with smart apps that let you manage your pension plans in the same way many of us manage much of our lives right now. The point is, your pensions, their charges and their progress towards your financial goals could be as accessible as any regular current account out there.
- Transferring your pension doesn’t have to be painful
As far as simplicity goes, it’s worth mentioning that the act of transferring a pension has moved on too. While some providers might still ask you to complete a multitude of forms to get things moving, others have addressed the common ‘pain points’ for their customers and offer an end-to-end digital transfer service to help.
For some it’s as simple as providing the name of your policy provider along with a few bits of personal information and they take care of the rest for you. So if the idea of tackling the transfer process itself leaves you cold, it could pay to choose a provider that does the hard work for you.
- And don’t forget about diversification
While bringing your pensions together in one place might feel like the opposite of keeping your savings diversified, this doesn’t have to be the case. Depending on the provider, you can still choose to invest in a range of different assets, in plans with different aims and objectives, depending on what’s right for you.
Some might offer ‘active’ pension solutions, investments with a professional fund manager deciding where and when to invest your money on your behalf. Active managers aim to achieve the best possible long-term returns for your investment while managing the risk of potential losses too.
Others might offer more ‘passive’ solutions that aim to track the performance of a particular market benchmark or index. These are likely to carry lower charges than active investments as they tend to involve less intervention by fund managers or use lower-cost assets like ETFs (Exchange-Traded Funds) to achieve their objectives.
Whether you’re looking to invest your pensions in equities, or corporate bonds (bonds issued by companies) it’s worth seeking out a provider that offers a range of different options to help you keep your retirement savings diversified. It might mean a little work in the short term. But it could make life easier and boost the value of your pensions in the future. However, once combined, its highly unlikely you will be able to reverse that decision if you change your mind.