5 Ways to check if you’re on track for retirement
I pay into a pension at work and won’t retire for ages. Can I not think about it for a few years or is there something else I should be doing? What should I check on and how often?
Richard Parkin, head of pensions policy at Fidelity International, replies: Firstly, it’s great news that you joined your workplace pension and have stayed in.
Workplace pensions are almost always the right thing to do because of the employer contribution. Also, the earlier you start the better.
In terms of what you should be thinking about, there are a few basic steps that will help you stay on track.
1) Make the most of your employer contributions.
While employers are required to make a minimum level of contribution on your behalf, many will do more.
Check with your employer and see if they offer a ‘contribution match’. This means that they match additional contributions you make into your pension up to a maximum. An example of this is where your contribution is matched up to a maximum of 8 per cent meaning that your pension would receive 16 per cent in total. A not inconsiderable amount!
2) Pay in as much as possible and use tools to help you.
The question of how much you need to save for retirement is full of uncertainty but there are tools that can help.
The provider of your employer pension will almost certainly have tools that allow you to input your salary, contributions from employer and yourself and other details to tell you what your pot could look like when you come to retire.
And if they don’t? Google ‘Pension Calculator’ and you get lots of options which you can utilise. Calculators are good as they give you a rough idea of where you will end up as well as allowing you to see where you could do better. Remember though that these calculators are only showing what could happen, not what will. The best way of using them is to regularly review how you’re getting on and adjusting your approach accordingly.
3) Check where your workplace pension is invested.
If you’ve been put in to your employer’s pension scheme automatically, then you will almost certainly be in something called the default fund. And unless you are an investment expert or feel very confident investing by yourself, I would suggest you stay in it. The default fund is designed for people who haven’t actively chosen where they want their contributions to go. Generally these funds are invested in higher risk, higher return assets such as company shares when you have a long time to go to retirement and so can tolerate the ups and downs of the market. Default funds are also subject to a cap on charges so that pension providers cannot charge more than 0.75 per cent of the fund each year. Many will charge significantly less than this but cheap doesn’t always mean better.
It may make sense to review your investment options closer to retirement when you have a clearer idea of what you need from your pension and getting advice to help you at this time is a great idea.
4) Look at whether your investments could do better.
For those who want to get more involved with choosing investments then there are a few things to think about. Firstly, remember that different funds will have different levels of risk. You generally have to take more risk to get more reward. When you are a long way from retirement you have more time to recover from any market falls so it can pay to invest in funds that hold riskier assets such as company shares (often called equities) with the aim of growing your savings.
Generally funds that focus in one sector or region can be riskier than funds that invest in larger companies and spread their investments globally so you should think carefully before putting large parts of your savings into these.
Fixed income funds will tend to be less risky than equity funds but will generally offer lower returns. But don’t think all fixed income funds are the same. Those that invest in high yield debt – loans to riskier companies or countries – or long-term debt can still be very volatile.
Multi asset funds will hold a mix of investments and the fund manager will usually change the mix based on their view of markets. These may be a better choice for those who are less confident making all the decisions.
Whatever fund you’re considering, check the fund fact sheet to get a better understanding of its risk profile. As always, don’t just invest in a fund because it has done well in the past. All too often it is those investments that have done well that are likely to struggle in the near future. Pension saving is for the long-term. Trying to time markets in the short-term may not deliver the best long-term returns.
5) Don’t feel you have to check your pension every day.
It’s important to know how much you have in your pension but it’s not a bank account so you don’t need to check it every day.
If you do, remember that investments will go up and down so don’t feel that you have to change things just because the markets aren’t doing so well today. Taking a long term approach is important.
