Pensions are Powerful
Double your money for retirement - for free?
Hi friends,
Pensions. A loaded topic that can seem complex, boring, or something to think about tomorrow.
Last week, I spoke about how budgeting secures our present.
This week I will talk about how a few simple actions could double the amount of money you have in retirement - for free!
Our workplace pensions are the backbone to a secure future and provide for us so we won’t have to work forever.
It’s important we get a grasp on how they work so they can work for us.
The state pension currently pays just £11,502.40 a year. Think you can live on that?
Our workplace pension can only support us if we sit up and take a few moments to check we are maximising the power of our pension.
This week I will talk about:
What is my pension?
How to check your pension is working for you
Why we should maximise the free money our employers give us
My pension is where!?
Your pension is invested.
You may be surprised to know that the money you contribute to your pension isn’t held in a bank account with your name on it waiting for you to get old.
Your money is given to a pension company which invests in stock markets around the world, property, commodities and more.
It’s important to check you’re actually enrolled into a pension scheme.
If you’re employed and aged over 22 it’s the law for your employer to enroll you into a pension. The best way to check is by your payslip or asking your employer.
So now we’ve established your pension is invested - that make you an investor.
This means it’s your responsibility to ensure your pension is working for you to support you.
Your pension is your responsibility
Decades ago most pension schemes were a Defined Benefit scheme.
This essentially meant you paid money in each month and then when you come to retire the pension company would guarantee you an income for life based on your salary. Easy peasy.
This type of pension scheme rarely exists anymore and is often only seen in the public sector but in a much watered down version.
Most people nowadays have a type of pension called Defined Contribution.
This is basically a pot where you and your employer contribute money. The pension company invest that money and you have whatever is in the pot when you come to retire.
This means all the responsibility and risk is placed onto you.
If you’re not investing the right amount of money or investing into the right things then you’ll likely get a nasty surprise when you want to retire and realise you can’t.
Pension companies know best?
It’s naive to think pension companies have your best interests at heart. Initially it can make sense to think “They’re professionals. They know what’s best for me.”
It’s true they do know what’s best for you but that doesn’t mean they will always act in your best interest. The pension company is there to make money for themselves.
Not only do they charge hefty fees for looking after your pension but they often create their own investment funds to put your money in (which you pay for!).
These funds aren’t always the best things out there and so they are essentially using your money to pay themselves.
This is why it’s important to check your pension is working for you.
Is my pension working for me or against me?
Here’s how to check what your pension is invested in:
Ask your employer what pension provider you’re enrolled in or check your annual pension statement which will come from your pension provider. If you’ve had multiple jobs you can use the Government pension tracker service to easily find yours.
Log in and look at what fund your pension is currently invested. The pension company website will give a breakdown of what your money is invested in and how much of it is invested in different things.
Once you’ve got this information it’s time to think how far away you are from retiring.
If you’re decades away from retiring it means you have time to take greater risks in the search of greater rewards.
Often pension companies will put you in a “balanced” portfolio by default.
This will include lower growth and less volatile investments like bonds and cash as well as higher growth and higher volatile investments like equities.
As I am so many years away from accessing my pension I like to have my pension in equities.
Despite the higher volatility of equities, I have so much time to ride out the waves and benefit from the higher growth.
Let’s take an example
Kevin and Kate are both enrolled with the same pension provider and want to retire in 30 years time.
They both currently have £3,000 in their pension and between them and their employer contributes a combined total of £100 a month.
Kevin sticks with the default fund.
Kate takes an interest in her pension.
She logs into her pension provider’s website and changes to a different fund that is more exposed to equities.
Kevin’s fund returns on average 5% growth annually for the next 30 years.
Kate’s fund returns on average 9% growth annually for the next 30 years.
In 30 years time, Kevin’s pension would be worth around £118,000. Kate’s pension would be worth around £263,000.
The small interest and action Kate took in her pension led her to have over double the amount of money Kevin has. Giving her a much better retirement.
Don’t leave free money on the table
It’s a legal requirement for your employer to contribute 3% of your salary to your pension.
However, some employers are willing to contribute more as a perk. This is effectively free money.
Often employers offer a match scheme.
This is where whatever amount you personally contribute towards your pension the employer will match it (usually up to limit).
For example, your employer may offer a 7% pension contribution match. This means if you contribute 7% of your salary to your pension so will your employer.
You should see this as like getting a pay rise! Although you won’t be able to access that pay rise money straight away - it is your money.
Go and talk to your employer to ask them if they offer a pension contribution match scheme or if they’ll start one. Get your free money!
Thanks for reading. Please share with your friends if you found it useful!
The information discussed isn’t a recommendation nor financial advice. It is important to do your own research and always remember that the value of investments may fall or rise meaning investors may get back less than they invested.