As we head towards Pension Awareness Day we should all take some time to consider what our retirement years will look like. There has been a very significant change in pension legislation over recent years, with all employees now having to be enrolled in a workplace pension. However, whilst compulsion to provide a pension is a good thing, it has not resulted in any widespread change in the attitude of savers. Most members of workplace pensions pay what is legally required and these contributions are invested in default funds, simply because of a lack of understanding in what appears to be a boring and complex subject.
The reality is that the pension funds being accrued by younger members of the workforce now will be their single biggest asset in years to come, probably even dwarfing the value of properties (for those lucky enough to get on the property ladder). The difference between a reasonable pension and a good pension often lies not only in the contributions made, but where these are invested. When it comes to investment, time is either your biggest ally or your biggest enemy! Pension savings made early on in life, with 30 or 40 years to go, will massively outperform those made in later years. This is simply down to the effect of compound interest. The longer you leave it, the harder it becomes!
Another big boost can be achieved by taking good independent advice. There are literally thousands of investment options and the difference between the top and bottom quartile investments can be huge, especially over long periods of time. An adviser will think differently and devise a proper plan which can be monitored and adapted over the years.
Start by getting a state pension projection. Whilst this is never going to provide you with anything more than a very basic retirement, it is the foundations upon which you are building your other provision. Most clients I meet have not had a projection, despite the fact they can be obtained online in seconds.
These clients often have numerous pension plans from previous employments which have not been reviewed in years. Many of these are often quite valuable and will form a good proportion of their retirement income. The common factor, however, is that they don’t realise what they will provide, nor do they know how much they will need to achieve their retirement goals.
Unfortunately, even with government intervention in terms of the workplace pension, the biggest danger facing pension savers is one of lack of understanding and/or interest in what will be their single biggest asset. Let’s use Pension Awareness Day to turn this on its head and plan. Work out what you will need in today’s money and we will tell you what you will need to do to achieve it. You may not be able to immediately afford what is required, but it certainly brings focus.