For many people, the value of their pension savings can be their most significant asset, alongside their home. However, pension savings are often neglected due to perceived complexity surrounding pension rules, investment choice and clients accruing multiple schemes throughout a working life.
Different types of pensions
Whilst there are different types of pensions (Final Salary and Money Purchase), and a number of flexible choices once retirement is reached, I want to focus this article on three of the most important things to consider with money purchase schemes during the accumulation stage (usually whilst working and contributing) that will influence the value of your pension at retirement; Contribution Level, Investment Content and Charges.
1: Contribution Level:
Auto-enrolment now obligates an employer to contribute a % of earnings to an employees’ pension (subject to certain earnings limits). In addition, an employee (or a director and the self-employed) can contribute an amount linked to their earnings. The incentive to do so currently available from the government is that they provide tax-relief on personal contributions, so a basic rate taxpayer saves 20% tax on their pension contributions, a higher rate taxpayer 40% and additional rate 45%. There are maximum annual allowance limits applicable.
2: Investment Content:
Once the money has been paid into the pension scheme, it should usually be invested in an attempt to earn a higher return than cash and aim to preserve and grow the real value of the pension fund (the value after inflation).
Different pension schemes will offer a variety of investment options; some will offer a wide investment choice and others can be more restricted. Modern plans usually provide a wider range, with SIPP’s usually offering the greatest choice.
The level of investment risk should be considered on an individual basis, linked to your attitude to risk, the time left before reaching retirement and your overall financial situation (including other savings and investments). It should be remembered that investment returns are not guaranteed.
Since the introduction of auto enrolment, competition amongst pension providers has increased and charges have reduced. This is great news for clients starting pension plans now and whilst some older schemes have adjusted their charges accordingly, many haven’t. The amount you pay in charges will have a direct impact on the value of the pension fund at retirement and the longer the money remains invested, the bigger the impact on your pension value.
In combination the right level of contribution, invested in high quality investments with reasonable charges can be a powerful formula to help provide you with a financially secure retirement. We offer an initial, no obligation meeting to discuss your objectives and would be happy to answer any of your questions. It is possible to switch pension plans from one provider to another if the existing pension plan is no longer suitable (any charges related to this work would be quoted and agreed in advance and would not be contingent on a switch).
Howard Goodship is an Independent Financial Adviser with Lonsdale Wealth Management, 5 Friday’s Court, Ringwood Tel: 01425 208490 www.lonsdaleservices.co.uk
Howard Goodship has written several articles for his Understanding Investments series. Read more below.
The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. The contents of this article are for information purposes only and do not constitute individual advice.