This article is part of Morningstar's "Perspectives" series, written by third-party contributors. Here, Fidelity Worldwide Investment's Julian Webb, head of DC and Workplace Savings, offers five tips to help to freshen up your pension.
Are You Getting the Most Out of Your Pension?
Spring is the perfect time to dust off the cobwebs and give your wardrobes a clear-out but you should take the opportunity to give your pension a good spring clean as well. Here are six tips to help you freshen up your pension:
1. Find out about your company pension scheme
The roll out of auto-enrolment in the UK means that many employees who are not a member of their company pension will be enrolled into it at some point over the next few years. It is worthwhile checking out your company pension ahead of this happening as you could benefit from your company’s current contribution rates which could be withdrawn and replaced with the minimum contribution rates set by the Government when auto-enrolment is rolled out at your firm. The average employer contribution rate today is 6.6%, whereas, the Government’s employer rate for auto-enrolment starts from 1%. Fidelity’s calculations show that you could benefit from over £10,000 more in employer pension contributions over a decade if you join your company pension ahead of your auto-enrolment date.*
2. Don’t forget about your pension pots no matter how small
Recent research from Age UK has shown that one in four adults have lost track of at least one pension during their working lives. On average people move jobs approximately six times during their working life which means they will accumulate a number of pensions with different employers.** Whilst consolidating your pots into a single pot with your current employer will help you keep track of your pension savings and monitor the performance of your pot more easily, it may not be the best option for you, as you need to be mindful of exit penalties, fund charges and the potential loss of guarantees provided by existing funds. If you think you have lost a pension, you can track it down at: www.gov.uk/find-lost-pension
3. Get the most out of employer contribution rates
Contribution matching, whereby your employer matches the contribution you put in, is common in company pension schemes. Many employers will increase their contributions if you increase yours. Fidelity has estimated that a 25-year-old on average earnings who contributes 3% of salary and receives 3% from their employer could receive an annual retirement income of £6,538.68. However, an employee contributing 5% of salary and receiving 5% from their employer could receive an annual retirement income of £10,918.68 at today’s annuity rates.***
4. Marry up your retirement savings with your retirement aspirations
Every year you should get a statement from your pension provider telling you what your current pension pot is worth and a projection of how much it will be worth when you reach your selected retirement age. It is a good idea to regularly check that this pension projection marries up with how much you are expecting to retire with. For example, you might want to consider working longer or part-time to improve your retirement income as not only will you be able to save more and give your pot more time to grow, but annuity rates generally improve as you get older.
5. Make the most of your employee benefits
An increasing number of employers are offering other types of savings products through the workplace including employee share schemes and ISAs. ISAs are a great way to save alongside your pension and like pensions they are tax efficient with the added benefit of your money being accessible whenever you want it. The start of the new tax year is the perfect opportunity to make the most of your ISA allowance as investing earlier rather than later in the tax year simply gives your money more time to grow.
Check your state pension entitlement and state pension age
The date you reach State Pension age depends on when you were born and the amount of state pension you get is dependent on how much you have paid in National Insurance contributions through your working life. The Government is due to implement a new flat rate state pension in 2016, which will make retirement planning much easier as people will be able to work out exactly how much they need on top of the state pension to achieve their desired retirement income. You can find out your state pension age and how much you are entitled to by using the Government’s state pension calculator.
*Assumptions for projections & total returns:
Average salary is £26,200 (Source: Annual Survey of Hours and Earnings: November 2011)
Average employer contribution rates for occupational pension schemes (ONS: October 2012)
This data is only based on occupational pension schemes and excludes personal pensions and other workplace DC schemes such as Group Personal Pensions and Group Stakeholder Pension Schemes
£17,269.51= Pension contribution total for someone on average earnings contributing 2.8% of salary and receiving employer contributions of 6.6% of salary: (these figures factor in salaries rising inline with inflation at 3% but do not take into account investment performance)
£6,060.16 = These figures are based on auto-enrolment legal minimum contributions: 1% from the employer and 1% from the employee from 2012 to end 2016, 3% from the employee and 2% from the employer in 2017 and 5% from the employee and 3% from the employer from 2018.
** Age UK (2013)
***Annuity quotation: (using Annuity Direct’s annuity calculator 19/04/13)
3% contribution rate: pot size after 40 years £160,527.81
5% contribution rate: pot size after 40 years £267,546.34 (based on inflation at 2%, investment growth of 5% and a fund Total Expenses Ratio of 1.5%)
As a result of the effects of inflation, these amounts will not necessarily have the same buying power in the future as they have today.
Assumptions for projections:
Male, Age 65, Tax Free Cash 25% (Lump Sum), Single life, Paid monthly in arrears, No escalation, No Guarantee, Standard Rates (not enhanced)
