Five Tips for Pension Planning
The sweeping changes to the pension system introduced by the Pensions Act in May 2014 have put retirement planning in the spotlight. But pension planning is complex, requires long-term attention and, yes, can be a bit boring! So to help those thinking about retirement planning I offer five quick tips, drawn from over a decade of experience in pension advisory work for individuals and corporates. 1) Don’t wait till it’s too late With life expectancy in the developed world now reaching well into the 80s, individuals can expect to have to support themselves for around 20 years in old age. The UK state pension, at just £144 per week from April 2017, does not provide much to live on and makes the need to plan and save for retirement more critical than ever. The sooner you start saving towards retirement the better off you will be. 2) Know your investments We always recommend an annual review to ensure you know both what are you invested in, and whether those investments are performing. Recent FE research indicates that a staggering 80% of funds are under-performing. If your investment is not performing as expected, essentially you are paying fund management fees for little or no benefit and would be better off putting your money in a low cost tracker or index fund. Or perhaps your investments are letting you down on a different measure. Do the funds and companies you have invested in reflect your ethics and beliefs? Or are they engaged in activities which you are not comfortable supporting, such as the manufacture of controversial weapons, tobacco or payday lending. 3) Regularly review the fees you’re paying In 2002 when I began pension advisory work, individuals could expect to pay plan charges of nearly 2% per annum. Since then thanks to a combination of both legislative changes and an increasingly competitive market place pension management fees have dropped significantly and I have recently been arranging pensions with plan fees of less than 0.5%. Keeping that saving in your pension fund can make a big difference to its size. 4) Consider the long term Retirement planning requires long-term consideration of how investments perform, as you may not require your income for several decades, depending on your current age. However too many pension investors put undue focus on the short term, judging success over a period of a few months rather than a few years. One only need look at Warren Buffet’s investment strategy to realise that going where others fear to tread can and often does pay off. For example, his investment in Goldman Sachs in 2008 at the height of the financial crisis made him around $2bn in 2013 . There are several funds in the UK focused on sustainability that take the long-term into account by looking at ‘slow-burn’ issues such as obesity in the US or the need for alternatives to carbon based fuel sources, and invest in companies likely to benefit as those issues grow in impact and importance. 5) Don’t underestimate the amount you need to save Many people report that they are disillusioned with the level of income they are due to receive from their pension plan in retirement. Leading retirement annuity provider Just Retirement has calculated that it takes about £160,000 to generate a retirement income of £10,000 per year; but the average UK pension pot at the time of retirement is just £36,800. A small increase to the amount you put away each month can have a considerable impact on the end value of the your pot and therefore your income level at retirement. For example in a pension fund with an annual growth rate of 5%:
- Committing £400/month for 25 years may result in a total of £238,203 (£112,624 when adjusted for inflation);
- Committing £450/month for 25 years may result in a total of £267,979 (£126,703 when adjusted for inflation).
So a difference of £29,776. Please be aware that the figures shown above do not allow for plan charges or fees, they are intended to provide a simplified indication of how compounded growth works. Making an annual adjustment for inflation (approx. 2%) to your pension contribution is another way to make minor adjustments to your pension contributions that will result in a greater return in the long run. For more information on our retirement planning and pension advisory work or any aspect of our work please see our website or contact us.