Why your pension plan cannot be left to chance
Retirement may seem far away, but your choices today could massively affect your quality of life once you reach your 50s, 60s and beyond. Whilst it may be tempting to put off planning your pension, it’s vital to think of your future self, not just your present.
Leaving your pension to chance is like setting sail on the open sea – with no compass, supplies or navigational systems. You need to be prepared, especially in light of rising life expectancy, fluctuating markets and evolving tax and pension regulations.
Below, our financial planners in London, Grantham and Leicester show why planning ahead is so important for retirement, and some practical steps to start plotting a more effective course towards your goals.
The power of 1%
To illustrate how powerful early planning is, consider the potential difference 1% annual growth could make to your future retirement fund.
Suppose you contribute £200 per month to your pension, and over 30 years your investments grew by an average of 6% per year. By the time you retire, the total saved could be £201,000.
However, suppose you achieve a 7% average annual return. What difference could this make to your future retirement fund? By year 30, you could have £244,000 – that is, an extra £43,000.
Think of the difference that could make to your income in retirement, or to the future inheritance you might hope to eventually leave to your loved ones.
By planning far ahead, you can squeeze out every percentage point with your pension – making it work as hard as possible. This does not mean taking unnecessary risks (e.g. adopting a risk profile you are not comfortable with), but it does require looking carefully “under the hood”.
Pensions: under the hood
A great place to start is by checking your workplace scheme and looking at what your monthly contributions are getting invested in.
Many employees are automatically enrolled on a “default” portfolio when they first take up the job. This may not reflect their investment strategy, risk tolerance or long-term retirement goals.
For instance, a young employee with 30+ years until retirement might be better suited to a more “aggressive” investment strategy – e.g. heavily weighted towards equities. This is because there is plenty of time for the portfolio to recover from market falls over the investment horizon.
By changing their fund selection to a more growth-oriented strategy, this person could possibly achieve an extra 1% average annual return (or more). A financial adviser can help you explore your best fund options within your various pension schemes.
Another idea is to examine the underlying investments of your pension. In particular, what are you paying for fund management charges? After all, the higher the fee, the lower your “real returns”. For instance, if your fund grows by 8% over 12 months but the management fee is 2%, then you have only earned 6% (setting aside inflation and other fees).
Here, a financial adviser can help you explore options beyond your current scheme(s). If your workplace scheme does not offer competitively-priced funds, then it may be appropriate to explore setting up your own pension (a private/personal pension) where you can benefit from lower fees and wider investment choices.
The power of now
The earlier you start planning with your pension, the more you can benefit from the power of compound interest. This takes pressure away from your own savings over the long term, and could transform your future retirement income.
Here’s an example. Suppose you start investing in a pension with a £10,000 lump sum, making £200 monthly contributions thereafter. Your average annual real return is 6%, after accounting for fees and inflation. By Year 20, your fund could be worth about £125,000. However, what if you started 10 years earlier?
In this case, you could have £261,000 by Year 30 – i.e. well over double that of the 20-year timeframe. In short, the earlier you start planning and contributing to a pension, the more you stand to benefit from the “snowball effect” of compound interest.
A financial adviser brings tremendous value throughout this multi-decade journey.
Over such periods, market volatility is inevitable. Investor emotions and biases pull hard at you, and it is easy to make knee-jerk reactions to negative headlines or price swings. A seasoned expert can offer an objective sounding board when you are tempted to act impulsively.
An adviser can guide you through periods of transition. In particular, as clients get older and approach retirement, they often choose to “de-risk” their investments as they prepare for the “decumulation phase” (drawing an income from the funds, rather than focusing on growth).
Here, a professional can help you cover all the necessary bases and highlight areas of risk and opportunity to consider as you restructure your portfolio.
These are just a few of the benefits of planning ahead with your pension, and using a financial adviser to partner with you along the journey. If you’d like to make sure you’re taking the right steps to safeguard your financial future, please get in touch.
Please note:
Pension investments can go down as well as up, and you may not get back the amount you originally invested. Access to pension funds is normally available from age 55 (rising to 57 in 2028), and any tax benefits depend on your individual circumstances and current HMRC rules, which are subject to change. Making retirement decisions without guidance carries risks. It is strongly recommended that individuals consult Pension Wise or seek regulated financial advice before making any decisions about their pension plans. This content is provided for information purposes only and does not constitute financial or investment advice.
