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1. Stop delaying
Start as early as you can and pay in as much as you can reasonably afford. It may sound obvious, but it is a message that too few take to heart.
The earlier you start the more time your pension pot has to grow and the greater chance you have of achieving your ideal retirement income.
According to calculations by the insurer Legal & General, you would need to save £242 a month into a pension from the age of 25 to achieve an annual pension income of £5,000 in today’s terms at 65. If you waited until you were 45 to start saving you would need to pay in £451 a month to achieve the same income1.
2. Check your pension regularly
When was the last time you took a close look at your pension? Not just glanced at the pension statement sent to you once a year, but carefully evaluated how you are saving and whether you are on target to meet your retirement goals. For many people, the answer is never, and it is a situation they may live to regret. It’s only when they get to retirement that they realise that their pension falls far short of what they need.
So, once you have set up your pension don’t ignore it. As early as your 40s you should be asking yourself how much income you will need in retirement and working out whether you’re on course to meet that goal.
To help you work out what you have now and what you might need in the future, take a look at ‘A beginner’s guide to pensions’.
3. Don’t settle for the minimum
How much are you and your employer contributing to your pension? If you are not sure, ask your pension provider, which may be your employer or an insurance company. Then ask yourself if you could be saving more.
Millions of people have recently started a pension under the government’s auto-enrolment system. The government has set minimum contribution levels for auto-enrolment pensions, and some experts think these may be too low to deliver adequate pensions.
The minimum contribution level to an auto-enrolment pension, including company and employer contributions and tax relief, is just 2 per cent. Over time this will increase to 8 per cent, which sounds like a lot but is unlikely to be enough to deliver a satisfactory retirement for most people.
Pension experts say that you should be saving half of your age as a percentage of income. A 40-year-old should be saving 20 per cent of their salary into a pension, and a 20-year-old should save 10 per cent.
If you’re not able to contribute more now, remember that you can increase your savings at any time in the future. There is a limit on how much you can contribute into a pension each year but for most people the cap is generous. The current annual allowance limit is the lower of relevant earnings or £40,000. Once you are aware of the problem you can act when you’re ready..
4. Pay attention to your investments
Many investors opt for the default ‘lifestyle’ investment option when they join a pension fund. This usually means that your money is placed in a ‘balanced fund’ which invests in a combination of shares, bonds and cash. When you are younger most of the fund will be typically invested in shares but from your mid-fifties upwards your fund will be moved automatically out of shares and into bonds and cash.
This might not be what you want. If you’re younger you may be able to afford to take a fairly risky approach. You should be able to ride out any stock market downturns over the longer term so you might want to hold more in equities than a balanced fund allows. As you approach retirement it is often appropriate to move into less risky assets like bonds or cash, but it doesn’t suit everyone. This can be a complex area and it is sensible to get expert advice [from a financial adviser]
5. Don’t misplace a pension
Most of us work for more than one employer during our career so make sure you haven’t forgotten any pensions that are yours. According to government estimates there is £400m lying in unclaimed pension accounts2.
To find a lost pension enter the details of past employers in the Department for Work and Pension’s website. It will provide details of any pension schemes run by that company. You then need to contact the scheme provider to find out if you were a member of the scheme.
No matter what your New Year’s resolutions are for this year. It’s smart to make 2017 the year you focus on your pension. You’ll be glad you did in the long term.
1. Legal & General: The cost of delay, 6 January 2017.
2. Department for Work and Pensions: New Pension Tracing Service website launched, 9 May 2016.
What is Money Means?
Money Means is a news and information series written by independent financial and consumer journalists and experts*. FSCS launched Money Means in 2016 to help give people clear and useful information about personal finance, to increase their understanding and confidence when dealing with money.
*THE VIEWS EXPRESSED IN MONEY MEANS ARE OF THE WRITERS AND NOT OF FSCS AND SHOULD NOT BE REGARDED AS ADVICE.
If this is the year you plan to get your pension in order, here are five tips to help you take control of your retirement savings