Some people allow their pension fund to trundle on unmonitored – so when they give it the attention it deserves, it may seem a little strange and a bit of a mystery.
If you do not keep a close eye on your pension fund you may find you have less than you imagined when you finally retire.
So, let’s defuse the mystery a bit and take a quick walk through the different pensions you may have – what to look out for in order to maximise income – and how you can make changes.
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Types of pension
Life would be so much simpler if all pension funds were all the same. Unfortunately, they are not. But generally, there are three main types of pension you will contribute to:
- Private pensions
This is usually a pension scheme you started yourself (unless it is set up through your employer) and is likely to be a defined contribution scheme.
In this type of scheme your contributions are invested by the pension provider. At retirement you receive all your contributions and any profits from the investment.
There are many different schemes and it is wise to monitor progress through the yearly report sent to you by the provider.
If you feel the scheme is not performing well, you can transfer your fund to another scheme, but you need to take into account any unique benefits and the state of the investment market overall.
- Work Pension
If you are over 22 years of age, earning over £10,000 a year and working in the UK it is likely you will have been automatically opted into your employer’s pension (Auto enrolment was introduced in 2012).
This is good in many ways: firstly, your employer will contribute a minimum of 3% of your yearly salary on top of what you contribute yourself; secondly, it gets you saving for the future; and thirdly it is organised for you so there is no hassle.
The pension type will either be a defined contribution scheme (see above) or a defined benefit scheme.
The latter is where your fund is based on your final salary and the number of years you spent working for your employer. You do not have to take the pension scheme offered.
In a world where people change jobs quickly and often, don’t forget previous pension savings.
- State Pension
Contributions towards your state pension are made automatically when you are working.
However, if you have periods of unemployment, these contributions may be missed, so it is wise to check the amount you will receive when you retire.
Benefits and charges
Different schemes will offer specific benefits. For instance, since 2015, it has been legal to access as much money as you like from an eligible pension pot from the age of 55.
However, not all pensions allow you to do this. Some pensions may not have this facility and defined benefit pension schemes do not allow it.
However, transferring your pension savings to a scheme which offers this benefit may be useful. And for all regulated financial advisers, the starting point if someone wants to take money early or transfer away from a defined benefit scheme is not to do it.
This is because final salary pensions promise to pay a guaranteed income for life, which is an extremely valuable benefit.
Be aware of charges. Your pension provider will charge a specific amount when your request is fulfilled. Because this amount will differ between providers, it is always wise to compare charges on the market.
Professional advice
Unless you have a thorough knowledge of pensions, it is always a good idea to seek the advice of a regulated pension advisor.
They will be able to access your pension’s performance and determine your options—not only in terms of the market but also in terms of your needs and aspirations.
1 Accessing your pension pot is not right for everyone, and it can leave some people a lot worse off in retirement. It is always wise to seek the advice of a regulated financial adviser.
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