Pension firms regularly tell us how we need to put more into our pensions.
Under employment rules, most employees automatically pay 5 per cent of their earnings into a pension scheme, with their employer adding an extra 3 per cent.
But many firms suggest paying more. One leading provider suggests trying to hit 12 per cent, and another suggests between 12 to 15 per cent to aim for.
They’re not wrong to point out that paying more money into your pension will probably ensure you have a better retirement once it comes.
If you pay only the minimum 8 per cent into your pension pot for life, you’re unlikely to get the later years you dream of.
But several other things are true at the same time.
Firstly, for many people, the idea of ramping up their pension contributions so dramatically is unrealistic, given the competing financial pressures they face in the here and now – childcare costs, mortgages, rents – rather than in several decades time.
Some may be lucky enough to have employers that pay generously into their pensions – over and above the 3 per cent minimum – but others would have to make up any shortfall themselves.
The UK lags behind certain international competitors on this. In Australia, employers must contribute 11 per cent of employees’ earnings into a retirement fund.
Secondly, lumping more and more cash into your pension is only part of the retirement saving jigsaw.
Though supplying money into your pension is key for financially comfortable later years, just as important is where your money is invested.
Read Next: I cut my house price by £25,000 when it didn’t sell for months – it was very stressful
You can put years and years of high contributions into a pot, but if that money is not growing significantly, its spending power will be eroded year after year by inflation.
Putting your earnings away is only a base to build off, and high compound investment year after year is equally, if not more, vital.
Research by AJ Bell last year found that nine out of ten UK pension funds have underperformed a FTSE All Share tracker – a basic fund that tracks the performance of a range of shares – over ten years.
So alongside telling us to give them more and more of our hard-earned cash – which they will skim money from in the form of fees – pension providers need to step up efforts to be as transparent as possible with where our money is held, and the alternative options available to us.
I have three private pensions in separate accounts and recently did an audit of where the money was invested.
While with one of the providers it was fairly simple for me to look at the default fund my money was in, and move it to a slightly riskier option, albeit with – in all likelihood – higher returns.
With the other two, I found it nigh on impossible to find a breakdown of where my money was, and it was not possible to change the allocation in the app.
Contrast this with the investment apps I use. I can pick from a range of pre-determined funds, with their past performance listed and their risk profile graded easily.
If I want to invest in individual equities, I can also easily do that, again, with access to graphs and figures that demonstrate how they have done over time.
Not everyone will want to do this of course. Many, without the understanding of how investing works, may want to leave those decisions up to their provider.
But to those who do want a more active role in their saving, pension providers need to ensure it is easy for them to do so.
Post a Comment