Take control of your long-term savings and give yourself the chance of getting better returns to live on in your old age.
With so much doom and gloom in news reports about pensions, many of us would be forgiven for looking for alternative ways to save for old age – or failing to do so altogether.
But whatever the downsides of the current system, a private pension should be a central plank of retirement planning for most people.
One of the biggest problems, however, is that savers tend to entrust their funds to the company running their pension and fail to take an interest in how their cash is performing.
If you want to take control of your long-term savings and give yourself the chance of getting better returns and investing in a pension that is more suited to you, read on to find out how.
The advantages of joining a pension scheme
Despite the bad press, pensions still have a lot going for them.
For a start there are the tax advantages which mean that, effectively, any money you put into a pension is exempt from income tax.
So if you put £80 of your taxed take-home pay into a pension the government automatically tops this up to £100.
And if you’re a higher-rate taxpayer you can reclaim a further £20 on your tax return.
Another incentive to join a work pensions scheme is if your employer pays into it aswell.
Many employers do contribute, often on the understanding that you put some money in yourself. So if you fail to sign up you could be losing out on a valuable benefit.
What’s wrong with a standard pension?
Once you have a pension the big question is where is the money invested?
Most company or private pensions are run by one of the big insurers – Prudential, Aviva, Legal & General, Scottish Widows.
They are likely to invest your monthly contributions in a one-size-fits-all fund that is quite low in risk and deemed suitable for large numbers of investors.
This could be a tracker fund, which is designed simply to mirror the performance of stock-market indices such as the FTSE 100.
But there may be better options available for you.
For example, if you are relatively young you could be better off investing in funds with higher risk. After all, there is plenty of time to make up any falls they experience.
The theory is that over the long-term, higher-risk investments should outperform lower-risk ones. So if you’re 30 years or more away from drawing your pension, this could be appropriate.
How to take control
If you want to ignore your pension, happy in the knowledge that someone else is dealing with it, this approach isn’t for you.
But if you want to have a greater say in how your cash is invested and keep a closer eye on how your pension is growing, follow these steps:
Step 1: Find out where you’re money’s going at the moment
Contact your pension company or check the literature you’ve been sent to see what funds your contributions are going into and how it is performing.
You should be able to find out this fund’s risk-rating - usually described as low, medium or high, or on a scale of 1 to 10 – as well as what type of companies and other assets, such as cash or bonds, it holds.
There are a number of online services that can give you more information about funds, such as that run by the Financial Times.
Step 2: Ask your pension provider what your options are
Your pension company should be able to talk to you about what other funds they offer and what kind of investor they suit. Alternatively you can do some research online.
You don’t have to stick with just one fund. You should be able to spread your cash across a wide range if you wish.
Step 3: Consider a different pension
With normal private pensions the choice of funds is likely to be quite limited, especially when compared to investing in a stocks-and-shares ISA, for example.
Normally, you are only able to put your money in a handful of funds offered by your pension provider.
It is possible to set up a pension called a self-invested personal pension (SIPP), on which annual charges are a bit higher but which allows you much more investment choice.
However, bear in mind that you are unlikely to be able to channel any employer contributions into a SIPP. So your best bet could be to set up a SIPP alongside your company pension if you have one.
SIPP providers such as Hargreaves Lansdown, Killik & Co and James Hay, provide a great deal of information about fund choices so you can research your investments thoroughly.
But consider whether this greater choice is really worth the higher charges.
Step 4: Keep an eye on your investments
Once you have made any changes you should keep fairly regular tabs on how they are performing.
This doesn’t mean every day - you don’t want to be chopping and changing all the time, or worrying about an investment which you won’t be able to access for decades - but every few weeks is a good idea.
In the years leading up to retirement, you should gradually reduce the amount of risk in your portfolio.
This will help avoid any nasty last-minute shocks when you come to turn your pension into retirement income, which many do by taking out an annuity.
Many pension providers automatically reduce the amount of risk in a customer's portfolio as s/he nears retirement age, through a process known as lifestyling.
However, if you’ve started changing how your own fund is invested, it is likely to mean your pension is no longer lifestyled in this way. So it will be up to you to keep an eye on your investments.
So we've told you why it might benefit you to pick your own pension funds. And because we're good to you, we've also put together some information on how to pick the right pension fund.
