Jon Greer, head of retirement policy at Quilter comments:
“It isn’t the coolest topic of conversation, and it is highly unlikely you’ll be chatting to your friends down the pub about your pension and what you are doing with it. However, it is more than likely you have a pension as, thanks to auto-enrolment, 87% of eligible workers have a workplace pension, up from 55% in 2012.
"Talk Money Week 2019 has a focus on pensions and while some people may switch off thinking it has nothing to do with them that is far from the case. As with most things pensions work better if they are given some attention and this week offers a reminder that just because you have a pension the job isn’t done.”
Jon highlights eight essential questions everyone should consider when it comes to their pension:
- What kind of pension do I have? There are two major kinds of pensions defined contribution pension and defined benefit pensions. Defined contribution are the more common pension schemes and if you are auto-enrolled you will likely be in this kind of scheme. Defined benefit pensions, sometimes known as final salary schemes, are pensions that provide a set annual income in your retirement until after you die.
- How much is going into my pension and is it enough? In general, under auto-enrolment the minimum contribution is 8%, 3% coming from your employer and the other 5% taken directly from your paycheck. Some employers go above and beyond those requirements.
You can figure out how much you are likely to have on an annual basis in retirement by using the Money Advice Service calculator. While saving into your pension at a young age seems unnecessary it’s far and away the best time to be saving as you’ll be giving the money the longest time possible to grow and compound.
- How is my money invested? If you’ve not reviewed your pension since joining a company it will have been placed in a default investment fund. It’s important to review this choice for numerous reasons including investment performance, price and does it align to your ethical beliefs.
- How many pensions do I have? The average person will have around 11 jobs in their lifetime and this could mean 11 different pension pots. The Department for Work and Pensions has found that there are hundreds of millions of pounds sitting in unclaimed pensions. It’s important to track down your pension and then get advice on whether consolidating makes sense. Soon the Pension Dashboard will make that easier by allowing people on place to look at all their pensions.
- Who should get the pension if I die? It’s critical that you nominate who you want to benefit from your pension if you prematurely die. In most cases a pension will automatically go to a spouse but some pensions give more flexibility if someone dies their pension pot can be passed on to both a spouse and other loved ones. Making sure death benefits are up to date and regularly reviewed can mean that even when you are gone your pension is still working.
- What should my withdrawal rate be? Recent data from the FCA show that 40% of withdrawals were withdrawn at an annual rate of 8% or more of the pot value. As a rule around 3.5% is considered a safe withdrawal rate. Projecting how much money you will need is complicated and getting it wrong could result in you running out of money at a point in your life when you are unable to make any more.
- What next? Unfortunately pensions are not a one and done kind of thing and they need to be regularly reviewed to ensure they are still on track to meet your needs. This is particularly true if you have life events such as get married, have children, get divorced etc. One of the best ways to realise just how far your money will stretch and then stay on top of it is to engage a financial adviser. They can paint a realistic picture of how much you can live on day by day in retirement and whether you’re on track to achieve that goal.