Top ways to ensure your pension is on the right path

For anyone with a retirement pot to look after it is important to be aware of what your pension is doing.

Pensions are an unfortunately complex retirement savings product, with a myriad of reliefs and tax rules around them which govern how much you can pay in, and what you can eventually take out. For that reason, it pays to ensure you’re keeping a close enough eye on your retirement funds to maximise the benefits of the pension and prevent any issues arising later in life.

Here are some key things to think about when it comes to your pension.

Are you contributing enough?

This is important for anyone saving into a pension, but the earlier you consider how much you’re saving into a pension the better. This is because the longer you leave more money to grow in a pension, the better the eventual outcome – i.e., how big your retirement fund – will be.

Final salary or ‘defined benefit’ (DB) pensions are on the way out. These were schemes in the past where workers paid in a nominal amount, but most of the liabilities for paying an income in retirement fell on either their employer, or in many cases for public sector workers, the government.

These days a defined contribution (DC) pension is much more likely to be what you’re saving into. What makes this different from DB is you only really get out what you put in to DC pensions. Employers are obliged to contribute a minimum of 3% to your workplace pension, with minimum personal contributions set at 5%. However, if you earn over £50,270 the contributions are capped to £183.46 per month. This isn’t a hard cap – you can increase your contributions – but you will have to actively ask your employer to increase them.

In terms of what is ‘enough’ this depends on what kind of lifestyle you would expect to maintain in later life and can be quite tricky to figure out. A common rule of thumb is that you would need to be able to give yourself an income worth around two thirds of what you earn today. This typically only factors in that you might have paid off your mortgage though, accounting for one third of your outgoings.

If you are unsure what sort of level you should be saving to, it is essential to speak to an adviser who can help you ascertain important aspects of planning for that retirement income.

Are you taking the right risk?

Contributions are one thing, but if a pot isn’t growing sufficiently over the long term, then this will greatly diminish the effectiveness of pension savings over a lifetime.

Another rule of thumb here is the younger you are, the more risk you should be taking. When you start a new workplace pension your money will be put in what is called the ‘default’ fund. These kinds of funds are routinely criticised for underperforming comparative funds elsewhere, and can leave retirees with disappointment come retirement.

Conversely, as you approach your chosen retirement age, it is a good idea to start considering derisking some of your portfolio. This is to preserve the value of the pot in long-term investment markets, and also to start adjusting some of your assets to focus on paying an income – which you will need in retirement.

How can I find missing pots?

With people regularly changing jobs over the years, it can be easier than you might assume to lose track of pension funds, particularly for older pots that don’t have digital accounts and might have been drawn up with simple paperwork.

This is also compounded by the financial services industry which is routinely changing company names or going through sales and mergers. The company who had your pot 10 year ago might be different today!

Fortunately, there are good ways to go about tracking down a missing pot. The government has a pension tracing service which should be your first port of call to track down an old pension. If this doesn’t bear fruit, then speaking to your old employer, then a financial adviser, could be good next steps as they will have more access to information about where the pension might have ended up.

Is it worth consolidating pots?

If you’ve found an old pot, or you’ve got small pots from old employers which you’re not contributing to, it could be worth considering consolidation of those pots. The main reasons why consolidation is beneficial is it makes it easier to manage the money in one place, and you could find somewhere better value, or with more options for your money to save.

There are a few drawbacks to pot consolidation that you should be aware of though. The first being that some pension pots, particularly older DB pots, come with specific arrangements, rules and bonuses that could be lost if you were to transfer the money out of that pot. If this could be the case for you, it is essential you speak to an adviser before taking any action.

Secondly, small pots do have some tax benefits, which can help toward certain goals when you retire. Once you reach pensions freedom age, pensions worth under £10,000 can be taken all in one go, with 25% tax free. You can do this with an unlimited number of workplace pensions, or with up to three personal pensions.

When can you access your retirement fund?

This comes down to the pension freedoms age mentioned above. This is currently set at 55 but will increase to 57 in 2028 to coincide with the rising state pension age.

It is ever more likely these days that you might be working well beyond the age of 57. If that is the case then it could be beneficial to draw upon other sources of wealth in your 50s and leave the pension untouched as long as possible, so you can continue to enjoy generous tax relief benefits from your salary.

An adviser can help you decide the best strategy for this and everything else mentioned previously in this article. Using tools such as cashflow modelling and by structuring growing wealth carefully, you will be able to maximise the benefit of a pension and minimise some of the potential pitfalls.