Pensions can be a real head-melter. They just aren’t interesting enough to hold our attention a lot of the time and the thought of all that paperwork can be the final straw.
But, to be honest that’s quite an outdated view of the whole thing. It’s easier than ever to keep an eye on the longest-term savings most of us will ever have.
Online portals and apps make them simple to access and even see what we might end up with when we’re turning grey.
Taking control of your financial future starts with these three simple questions. Once you’re done, our pension planning hub has a lot more on making your money work for you.
1. Where is my money?
Not a bad place to start. But, given how much we change jobs these days, it’s an important question to answer.
Education firm EdSurge found we’re likely to move jobs around four times in the first decade after we leave full-time learning.
And whether we’re moving around inside a company or hopping between a few, some estimates say young people today could rack up around 14 positions on their CV over their lifetimes.
That leaves a lot of room to forget about a few pension pots along the way or just not know where they are. The last thing you want when you’re getting ready to give up work for good is to suddenly realise you don’t know how to access those savings.
Take a second to think about which company administers your current workplace pension. Can you lay your hand on your account details? Do you know how much is in there?
What about all those other accounts you’ve left behind at other jobs? They’re still yours so it’s worth making sure you know where they are.
Rip the plaster off and spend an afternoon getting your house in order.
It might be a good option to bring them all together. A self-invested personal pension (SIPP) can be a useful way to pull all those previous pensions into one place. Just left a job? Why not pop that old pension into your SIPP?
You’ll need to check you wouldn’t lose any benefits by transferring old pensions (any defined benefit pensions with guaranteed income-for-life payouts might come in here).
For a lot of people, actually being able to see all your money in one place can be incredibly useful in planning for that third age.
2. What is my pension investing in?
So, you work for a company which is adding money into your pension every month. But what is that money being invested in?
Quite often, the investment options are distilled into something like a ‘lifestyle strategy’. These typically take on more risk when you’re younger and reduce that as you come up to retirement. You might even get to pick between low, medium and high risk options.
That doesn’t tell you much about the actual investments though. You might not mind that but if you are trying to steer clear of a certain sector or company for environmental, social or governance (ESG) reasons, it’s worth checking you aren’t inadvertently invested in it through your pension.
It’s also worth quizzing your holdings - do they really reflect your financial goals?
A lot of lifestyle strategies are set up as if you were to sell the lot and live off a pile of money in retirement. We are much more likely to stay invested and try to live off investment income, in which case taking risk off the table might not suit you.
Again, every pot you have will have a different take on this. Get to know them and, if it makes sense, maybe bring them together in a SIPP so you can decide what’s best for yourself.
3. How much do I need to retire?
For a yearly income of £30,000 (around the UK average) you’re likely to need a pot of around £750,000 when you collect your gold watch and grab a warm beer at your leaving do.
That sum might seem huge now but it would allow you to take 4% each year as income, and hopefully top that back up with 4% investment growth, ready for next year.
Your goal here is to cream off the investment growth each year, that’s why you need a pot this size to begin with.
If it were just a case of pulling money out every year without any opportunity for growth you’d have to have a pretty good idea of when you wouldn’t need money anymore. A morbid thought and probably the world’s worst guessing game.
UK dividends have historically sat between 4-5% so it’s not unreasonable to aim for annual investment growth around that range, which can replenish your pot for next year’s withdrawals.
But, as with most things in life, that model isn’t a sure thing. It needs a bit of wiggle room both for unforeseen expenses and in case your investments have an off year.
If you’re able to live off a variable income depending on what your investments are paying out, or can store up some nuts in the good times in case of a bleak winter, you’re less likely to dip into that initial pot.
It wouldn’t be the worst thing in the world to use some of the £750,000 but having less in there means your investments will have to work harder to make up the difference.
A 7% withdrawal rate would give you £52,500 per year but remember, using this model means you need to get back up to £750,000 in time for next year, which could put a lot more strain on your account.
Building your wealth over the long term should help you create a more stable financial future. Open an ISA account or transfer from another ISA provider and make the most of your £20,000 annual ISA allowance. Alternatively, start your personal pension early by regularly contributing to a SIPP or moving old pensions to a single SIPP pension pot. Find out how to choose between an ISA and a SIPP.