Pension do’s and don’ts

Written by Rebecca O'Connor on 14th September 2017

Its Pensions Awareness Week!!!!!! No, the exclamation marks don’t make it more exciting.

Millions of pounds are spent every year by the financial services industry to try to encourage people to at least spend a couple of hours a year – less than watching a series of Game of Thrones – on planning for their retirement. Only to find that we’re all too busy scrolling through Facebook updates to get the documents out of the filing cabinet.

They’ve tried scare tactics, which amount to “Do you want your old age to look like Dot Cotton’s? No? Well get your backside in gear then”. The plain numbers approach, which goes something like: “£100 a month now will make you a millionaire by the time you reach 65”. They’ve tried the carrot approach: “Just think what you will be able to do in thirty years’ time, oh the caviar you will eat! The cruises you will go on! If only you set aside at least £200 a month now (with us).”

The industry is right, of course. Instead of spending £50 on fripperies we find on Amazon during a quick half an hour browse before bedtime (when we tend to spend on stuff we don’t need, according to this research) we should really be upping our contribution to a pension scheme, which offers tax relief at the rate of income tax we usually pay (so a £1 contribution costs 80p if you are a basic rate taxpayer, 60p if you are higher rate).

Why don’t we put more in our pensions, then? Busy, or distracted? Scrolling down through feeds, shopping on Amazon Prime, or getting depressed by world affairs. It is possible some of us find it difficult to contemplate something that’s 30 or 40 years from now (at best, but especially when the threat of nuclear war, climate change, terrorism and unstable governments seem so pressing.)

Why is the industry so interested in your future, when you aren’t? Well, obviously, it isn’t really, it’s interested in the lovely fees it earns for managing your pension pot every year. And those fees can be sizeable, grabbing thousands of pounds worth of your pension pot over the years, without you even realising. Annual management fees can be as high as 10.4 per cent a year, according to PensionBee, the online pension platform, quickly eroding the value of smaller pots.

But the mere fact of dastardly practice in the industry shouldn’t put you off saving for your future entirely. Nor should the outlook for global financial markets, which no one can predict, but which do tend to rise over the long term. Nor should how much of a faff it is to choose, from a seemingly endless array of options that all basically look and smell the same, but with slightly different branding.

DON’T get jaded. Yes, fees can be too high and they are all, truth be told, much of a muchness, because there are only so many companies that fund managers can legitimately invest people’s life savings in. But it is still, still, still better to do it, than not.

Do MORE pension saving than you have to, in fact. Don’t just stick with the minimum amount you have to pay through the scheme you are auto-enrolled on at work. Open up a separate private pension. Start a Lifetime ISA, which offers a 25 per cent top up on savings up to £4,000 a year and can be used either for a first home or for retirement savings investment platforms such as AJ Bell and Hargreaves Lansdown offer these). Maybe even consider a long term bond.

DON’T make yourself go broke in the process, of course – you still need to live after all. But DO stash your pension cash away, ideally by direct debit, soon after you get paid, so there is no temptation to spend it.

Now the big question: where? Pensions providers such as Aviva, L&G, NEST and Standard Life have all been credited with a more sustainable than average approach to investing, as well as being fair to customers.

Wherever you save, DO consider the ethical option on offer, if there is one. Study after study show that you don’t have to compromise financially by taking a more society-friendly approach to investing. It makes you more interested in it and feel even better about doing it (speaking from personal experience anyway – I recently opened a NEST ethical pension, on top of my Lifetime ISA invested in WHEB Sustainability).

Then there’s PensionBee, which offers very low fees, a great user experience and a new understanding of your pension that actually makes saving a pleasure (although doesn’t yet offer an ethical option). Then there are Self-Invested Personal Pensions, which come with slightly higher charges, but allow you to invest in a wider range of funds and assets than you get from a standard pension, still with the benefit of tax relief at your usual rate.

The golden rules of pension saving are: just do it, top-up the minimum whenever you can, check charges before choosing which company to invest your pension with, choose a fund you feel really comfortable with.

Follow these, and you are guaranteed a lasting feel good factor better than anything that comes in a package through the door.

Time to close the Amazon tab?

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