A recent study from The Wisdom Council suggests we don’t know our pensions as well as we think we do. It found that 40% of millennials thought they had a defined benefit pension, whereas in reality only around 20% do. Of those surveyed, 60% still hope to retire in their sixties despite the rising cost of living and, perhaps more crucially, them not saving enough.
Not only does this gap in understanding have huge repercussions for the group who thought their employer was handling their pension for them, but also for the majority of savers who have unrealistic expectations for their retirement. Most of all, it highlights that we could all benefit from taking some steps to get more closely acquainted with our pensions.
8 ways to get to know your pension better
The fact that you’re reading this article is a good starting point, and there are lots of things you can do to get to know your pension better. Follow these eight steps to find out more about how pensions work and the small changes you can make to better manage your money.
1. Find your pension paperwork
Check over any paperwork you’ve received since joining your workplace pension scheme. Details are usually included in the welcome pack you received from the HR team and should tell you who your pension provider is, as well as giving you an overview of the type of pension scheme on offer.
Under the rules of Auto-Enrolment, your employer has to offer you a pension when you start working for them and, during 2018/19, they have to contribute 2% of your annual salary to the scheme, while you have to contribute 3% of your annual earnings. You can choose to opt-out, but if you don’t do this before a certain date of joining your new workplace, you’ll be automatically enrolled.
If you didn’t opt out, you should have received further paperwork assigning you a policy number. And, depending on how long you’ve been enrolled in the scheme, you should also have received regular statements informing you how your funds are performing.
2. Understand the different types of pension
There are two main types of pensions in the UK; defined contribution pensions and defined benefit pensions. Unless you work in the public sector or for a large corporation it’s unlikely you’ll have a defined benefit pension. These are designed to pay out a retirement income based on your final salary and the number of years you’ve worked for a company, rather than the amount of money you’ve contributed to your pension. For this reason they can be expensive for employers and are becoming less and less common.
If you’re relatively young and just starting out in your career it’s likely you’ll have a more modern pension. Most new workplace pensions are defined contribution pensions, which pay out a retirement income based on how much money you’ve contributed and how your investments have performed over time. With this type of pension both you and your employer can contribute and you’ll also receive tax relief on your contributions from HMRC.
It’s crucial to know the difference because if you wrongly assume that you have a defined benefit pension, for example, and are expecting your employer to do everything on your behalf, you could end up seriously underprepared with a retirement shortfall.
3. Speak to the HR team at work
If you can’t find any pension paperwork at home or don’t remember receiving anything for a while, speak to the HR department when you’re next at work. They’ll know everything about your workplace pension scheme and can confirm if you’re enrolled by checking your payslips and other paperwork they have on file. It might be that your pension provider doesn’t have your most recent address or there could be another simple reason why you’re not receiving correspondence about your pension.
They’ll know everything about your workplace pension scheme
You can also speak to your HR colleagues about your level of contributions and can ask them for more detail on the level of contributions made by your employer. While Auto-Enrolment compels your employer to contribute 2% currently, companies are allowed to contribute significantly more should they wish to do so. Some workplaces offer what’s called contribution matching, which means they match what you pay in up to a certain amount. Your employer may agree to pay up to 5% into your pension, for example, as long as you also pay in 5%.
4. Calculate your expected retirement income
Based on the level of pension contributions you and your employers are making now, and when you’d like to retire, you can work out how much retirement income you’ll have saved by that date. Our pension calculator will help you do the sums and will illustrate how much you could draw out of your pension each year from whichever age you choose.
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While calculating your retirement income can be used to provide comfort that you’re on the right track, usually it’s a wake-up call to those without a good retirement plan. More often than not, people aren’t saving anywhere near enough for retirement and aren’t fully considering how big their pension pot would need to be to allow them to draw a healthy income for decades.
It’s never too late to make a difference to your pension, but it’s certainly harder for those who are closer to retirement age. On the other hand, millennials and other young workers have plenty of time to get their savings back on track and could make a huge difference to the size of their pension pot by contributing more from a younger age.
5. Look for any old workplace pensions
You need to know the total value of all of your pensions to properly calculate how much you’ve got saved. Workplace pensions have been around for decades, long before Auto-Enrolment came into effect, so depending on how long you’ve been working and the types of jobs you’ve held previously, it’s possible that you have some old pensions.
All PensionBee need is some dates of employment, a provider name or a policy number
If you can’t remember and don’t have old payslips and employment records to hand there are a few ways you can track down old pensions. The Pension Tracing Service is a good place to start and can help you find out the name of the pension provider chosen by each of your old employers. You’ll then have to liaise with them individually to trace any old pensions they may have in your name. If you consolidate your old pensions into one new plan, your new pension provider may be able to help you find any lost pensions. For instance, all PensionBee need is some dates of employment, a provider name or a policy number.
6. Transfer all of your pensions into one
Having multiple pensions dotted around can lead to confusion about how much money you’ve got saved and how it’s performing. It can also make it difficult to get a proper overview of your retirement planning. Transferring all of your old pensions into one pot can make managing your savings much more straightforward and you’ll only have one fee to worry about.
If you discover that you’ve got an old defined benefit pension you’ll need to think about the benefits you might lose by transferring your pension, but if you have a defined contribution pension this process is much more straightforward and there could be lots of benefits to consolidating your pension.
7. Increase your pension contributions
Here’s the thing about pensions, paying more money in can never be a bad idea. So if you can afford to contribute just 1 or 2% more than you are now, it’s worth increasing your contributions. If you’re young this can really work in your favour as the more money you pay in early on, the longer compound interest has to accumulate. And, if you’re nearing retirement age, increasinging your contributions in the few years before you start drawing your pension can help you boost the size of your pot significantly.
8. Stay on top of your pension
While looking after your pension is yet more life admin to remember, it doesn’t have to be a hard thing to manage. Especially if you’ve consolidated your pensions into one. Every time you move house you’ll have to inform just one pension provider and will only have to manage one pot.
If you choose PensionBee to look after your pension you’ll be able to manage it in the same way you do your bank account. You can manage your pension savings quickly and simply online and through our handy new app, rather than relying on sporadic paperwork and old fashioned methods. You should check your pension regularly to monitor its performance and ensure it’s meeting your expectations.
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.