Advice Investments Wealth management

Five key things to find out about your private pension

With Jon Greer


Jon Greer

Head of retirement policy at Quilter

Here are five key things to find out about your private pension to give you the best chance of a wealthy retirement

Some people switch off at the very mention of pensions, thinking it has nothing to do with them, but that is far from the case.

It is more than likely you have a pension as, thanks to the auto-enrolment of millions of people into workplace schemes, 87 per cent of eligible workers now have one.

1. What kind of pension do I have?

There are two major kinds of pensions - defined contribution and defined benefit.

Defined contribution means you and your employer are both adding to a pot of money that is invested to provide a fund for your retirement.

This is the more common type of pension nowadays, and if you are auto-enrolled you are likely to be in this kind of scheme.

Defined benefit pensions, sometimes known as final salary schemes, provide a set annual income in your retirement which is guaranteed until you die.

These have been phased out in the private sector but are still typical if you work in the public sector.

If you have a defined contribution scheme you will need to be more hands on about your pension, as you bear all the investment risk when building up your fund, not your employer.

2. How much is going into my pension and is it enough?

You should receive an annual pension statement from your pension provider.

Contact your pension provider, or if you don't know who that is, the benefits or human resources team at work if you can't find your latest statement.

In general, under auto-enrolment the minimum contribution is 8 per cent - 3 per cent of free cash from your employer, 1 per cent from Government tax relief and the other 4 per cent taken directly from your paycheck.

Some employers go above and beyond those requirements, particularly larger companies. Staff at FTSE 100 firms enjoy average contributions from their employer of 8.7 per cent.

Although 8 per cent is the auto enrolment minimum, financial experts tend to recommend you try to save a total of 12 per cent of your salary if you want a comfortable retirement.

If your employer offers to match higher contributions if you put more into your pension too, it's worth doing this if you can afford it as it means more free cash going into your pension pot.

While saving into your pension at a young age seems unnecessary it's far and away the best time to do this as you'll be giving the money the longest time possible to grow and compound your savings.

It is important to figure out what that means your annual income will be in retirement as it's highly unlikely to meet your goals if your contributions are made at the minimum (8 per cent) auto enrolment rate.

You have to factor in the state pension, which is built up separately via National Insurance contributions that also come out of your paycheck, and is currently worth around £8,800 a year to pensioners qualifying for the full amount. You can figure out how much you are likely to have on an annual basis in retirement by using the Money Advice Service calculator.

3. 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.

The most obvious is to check the investment performance. While some default funds perform strongly there are others that do not have great returns.

It's important to understand the risk ranking of your fund and its investment goal, and if it's achieving them.

It's also worth checking the fees and if the fund is providing good value for money.

There are of course cheaper and more expensive options. Price is not everything but you need to be comfortable with how much you're paying and why.

Many modern default funds are global trackers, which simply clone the performance of the world's stock markets, and typically cost about 0.3 per cent of your fund.

Last and but not least you should see if you want to shift what your underlying investments are in. For instance you can find funds that meet certain ethical criteria.

4. How many pensions do I have?

If you've had multiple jobs at different companies then you are highly likely to have numerous pensions.

Particularly if these are smaller pots of money, it may be worth your while to combine them into a single pension pot so you can keep track.

Most pension schemes of which you've been a member must send you a statement each year. If you're no longer receiving these statements – perhaps because of changes of address – then you can track down the pension through one of three bodies.

  • The pension provider, if your employer used an outside firm, or the trustees if it was an in-house scheme.
  • Your former employer, via its human resources or payroll department, or office manager if it was a small business
  • The Pension Tracing Service, a free Government service to help people find old pots.

5. What can I do to improve my pension?

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 at certain life events such as getting married, having children, getting divorced, and so on.

You'll need to consider things such as who would get your pension if you die and if you need to change the risk profile of your investments.

If you have any questions about your pension the free, government-backed Pensions Advisory Service is a great place to start.

As your financial situation gets more complex, which tends to be the case as you get older, it might be worth engaging 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.

However, you'll of course need to take into account the cost of advice and so it may not be something you pursue for a few years.

This article first appeared on on 15 November 2019