Brits check their reward card points and lottery numbers more frequently than their pension. With a pension providing you with financial security throughout your retirement years, it’s crucial to stay in the loop.
Despite how important a pension is to your life plans, many aren’t as engaged as they should be. Analysis from NOW: Pensions found:
- 25% of pension holders check their pension balance at least monthly; 19% have never checked it
- 45% check their reward card points at least once a month
- 39% make sure they keep up to date with lottery numbers
With the average person more likely to prioritise reward points over their pension, it’s not surprising that 38% have no idea how much they’ve saved for retirement. Just 19% have a clear idea of how much they’ve put away for their later years.
What should you know about your pension? We’ve outlined six key areas to get you up to speed on your pension and how it will provide for you in your later years:
1. The type of pension
Understanding the type of pension you have is the first step in calculating the level of income you can expect to receive once you start collecting it.
There are two main types of pension:
Defined Benefit scheme: Defined Benefit pensions are sometimes known as Final Salary pensions. How much income you receive from a Defined Benefit pension will depend on the scheme’s rule; not how much you pay in. You’ll know how the income you’ll receive at retirement age is calculated from the outset. It’s usually based on how long you work for an employer and your average salary. For the most part, it means you don’t have to think about areas such as value and risk.
Defined Contribution scheme: The amount you receive from a Defined Contribution pension will be based on how much you’ve paid in, how well the investments have performed, charges you’ve paid, and how you decide to take the money once you reach retirement age. As a result, being informed about investment risk and performance is important.
While the differences between the two may seem clear, it’s common to confuse them. Around 40% of millennials believe they have a Defined Benefit pension, according to a study from The Wisdom Council. The reality is that less than 20% of millennials have any element of a Final Salary pension.
The type of pension you have plays an important role in your retirement and overall financial plans.
2. Monthly contributions
Do you know how much you pay into your pension? If you’re unsure, it’s time to look at your payslips to get an idea of how quickly it’s building up.
For most of us in employment, pension deductions are automatic. If you just glance at your payslip to see how much will be landing in your bank, it’s an easy figure to miss.
For those with Defined Contribution pensions, this is an incredibly important step. The amount you put into your pension each month will directly affect how much you receive. You should also look at how much your employer is contributing too, allowing you to build up an accurate picture of how it’s increasing each month.
3. Current value
With only a quarter regularly checking their pension balance, many of us are unlikely to know just how much we’ve got saved up. But it’s an important figure to be aware of.
It gives you a basis to build future decisions on and ensure that you’re still on track to achieve your retirement aspirations. With many pension providers offering online platforms, it’s easy to regularly check what your current pension value is.
4. Returns and charges
If you have a Defined Contribution scheme, the performance of the assets your pension is invested in will have a direct impact on the value of it when you reach retirement age. As a result, keeping an eye on how your pension is performing is crucial.
There are likely to be times when your pension value temporarily decreases, as stocks and shares fall. But when you look back over the long term, you should be able to see a general upwards trend. Keeping track of your performance means you can see if changes need to be made and whether your money could be working harder.
On top of this, you’ll be paying charges too. Checking and keeping an eye on the charges you pay means you can ensure you’re getting value for money and using the best product for you.
5. Level of risk
Most pension providers will have several different risk profiles that you can choose from. When you first become a member of a scheme, you’ll usually be automatically assigned to a ‘balanced’ portfolio that takes a medium level of risk. Some providers will gradually move you to a more ‘cautious’ portfolio as you near your retirement date too. This is commonly known as lifestyling.
Your personal appetite for risk may mean that you want to increase or decrease the amount of volatility you’re exposed to. It will affect your final pension value, so is an important factor to consider. As a general rule, the further you are from your retirement date the greater the level of risk you can take.
Again, if you’re part of a Defined Benefit scheme, the risk and return on investments aren’t a concern for you; your retirement income isn’t tied to these.
6. Projected income
No matter the type of pension you have, understanding your projected income is important. Making realistic retirement plans can be impossible if you have no idea how much you’ll be able to take as income.
If your current pension provisions fall short, it gives you an opportunity to make other arrangements. The sooner you understand what your pension is likely to provide you with, the better you’ll be able to make up any potential shortfall in future income.
If you’re part of a Defined Contribution scheme, you can increase your monthly contributions, for example. Alternatively, if you’re a member of a Defined Benefit scheme other retirement provisions, such as a Personal Pension or investments, might be the option for you.
Projecting your retirement income can be challenging. It will usually be dependent on many other factors, such as investment performance or remaining with your current employer. But it’s an area we can help you with.
To better understand your current pension position and the level of income you can expect it to provide in retirement, please contact us. With our help, you’ll be on track for a retirement that matches your goals.
Note: A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.