Taking Charge of your Pension Benefits

Company pension schemes have been around in the UK since the mid-1700s and, whilst there is a larger uptake now compared with then, the fundamental issues are still yet to be resolved en masse. A pension is after all, intended to provide a comfortable income for individuals throughout their retirement. Why is it then that so many UK retirees find themselves short changed when it comes time to hang up the boots?

 Much of the problem was adjudged to be from a lack of uptake and/or regular savings. Thus autoenrollment was introduced in 2012, in today’s terms anyone working in the UK, aged 22+ and earning over ￡10k per annum is, by law, offered a workplace pension. There are various benefits to the UK saver such as guaranteed minimum employer contributions and tax relief at source, both of which vastly increase the employees tangible monthly contribution.

Despite this there are still various issues that may stop the average pension planholder reaching their desired retirement income;

Contribution Levels Too Low

As of April 2019, the minimum contribution by law is 8% of annual gross earnings (3% of this coming from employer and 5% from employee). Whilst this is a steady improvement for most, it’s widely accepted that a contribution of 12-15% is required for most to access a comfortable retirement. The solution is unfortunately not a simple as increasing minimum contributions either as this could lead to a spike in pension ‘opt outs’ which would only stand to create another, larger problem.

Reliance on Default Funds

Default funds are exactly as one might expect, they are often inexpensive & designed to fit the needs of the many, not the few. Their make-up is based around passive fund management i.e index tracking with no active management. This is then coupled with a target date strategy (lowering risk as one nears retirement).

In my own personal experience, due to a large proportion of employees losing track of their old pension once they move job, the end result will be that many high risk tolerance individuals may find their long-term retirement savings are not strategically placed to maximise their buying power in retirement.

Lack of Diversification

It’s easy to get lost in a combination of graphs, ratios and figures when discussing diversification but I find, most of the time, they do little to really drive the point home. It’s important to understand the power of having a portfolio that is not only split between multiple geographical regions but also across multiple asset classes (stocks, commodities, fixed income) and multiple fund manager styles.

This will help to make the most of all market opportunities as they arise whilst also mitigating risk. Whilst some workplace pensions will offer a decent degree of diversification it’s often limited in a bids to keep fund costs to a minimum.

Not Utilising Pound Cost Averaging

Pound Cost Averaging in a nutshell is the process of making regular contributions in order to lower fluctuations within your portfolio. The theory is that if the markets and therefore unit prices of a fund reduce, a regular investor can ‘buy in’ at a discount, thus smoothing out the downturn and riding the eventual upturn with more units. Of course, a regular pension contributor will benefit from this via happenstance at various points throughout the year but many will lack the flexibility with their provider to make additional one off contributions when markets fall. This leaves them unable to really power their future savings through using standard market fluctuations to their benefit.

Conclusion

It’s important to take stock of your current pensions and consider not only their recent performance but also how they are invested. I help hundreds of individuals ensure their pensions not only suit their risk tolerance but also provide them with the flexibility and diversification required to boost their future buying power.