Protecting your pension wealth has scarcely been more important following Rachel Reeves’ latest tax-grabbing Budget.
The Chancellor’s decision to impose national insurance contributions on workplace pension salary sacrifice schemes for contributions above £2,000 is the latest piece of the complex pension maze to navigate.
The raid will be delayed until April 2029, but will raise £4.7billion that year and £2.6billion in the following year.
Experts are concerned the added complexity and tax burden will deter even more people, particularly those in younger age groups, from saving enough for retirement.
Ali Adam, co-founder of fintech pension app Chest, said: ‘Salary sacrifice is one of your best tools in the box to encourage saving, so reducing the tax-efficient amount that people can contribute will make it harder, not easier, to save; adding fuel to the fire of misplaced optimism that’s putting young working people at risk.’
The Government has invested in a new Pension Commission to tackle the retirement savings shortfall but has also decided to add an additional burden to staff and employers using private sector workplace pensions.
Below, we outline five steps to ensure your pension stands the test of time.
Time for scrutiny: Paying close attention to your pension has become all the more important after Reeves’ latest Budget
1. Cut fees before they drain your pension
Starting a workplace pension as soon as you are eligible via auto-enrolment is a great way to help secure your financial future. The earlier you do join one the better.
However, whatever stage of life you are in, be careful about the fees deducted from your pension, whether it is a workplace or a self-invested personal pension (Sipp).
Fees on auto-enrolment workplace pensions have been capped at 0.75 per cent since April 2015, although pension schemes often cost less because most use inexpensive tracker funds, which follow the performance of one or a selection of the world’s stock markets and are cheap to own.
A limited number of older workplace pension schemes can attract fees of between 1 per cent to 1.5 per cent.
Look for the ‘annual management charge’ on your pension statement or online account.
For Sipps, fees can be applied which relate to platform costs, fund charges and dealing charges. Compare your fee to low-cost providers, some of which charge between 0.2 per cent to 0.5 per cent, according to Chest.
If you are unsure about the fees attached to your pension, ask your workplace or pension provider or platform.
2. Check your investments are suitable for your age
Most current employees will be signed up to a defined contribution workplace pension scheme.
Defined contribution pension schemes take contributions from both the employer and employee and invest them to provide a pot of money at retirement. It is then the saver’s responsibility to use this to generate a retirement income.
The minimum threshold for employer pension contributions is 3 per cent of an employee’s qualifying earnings, with the total minimum contribution for both employer and employee set at 8 per cent.
Defined contribution pensions are stingier than final salary, also known as defined benefit, ones and savers bear the investment and income risk, rather than employers.
Your defined contribution pension is invested in funds to grow your savings for retirement – and will often be lumped in a one-size-fit-all default fund.
These invest in the stock market, government and company bonds and other assets.
Many people have no idea where their pension cash is invested.
Your employer’s default pension fund is chosen to fit the average staff member, and the most people, – around 90 to 95 per cent – stick with it.
However, the default workplace pension fund may not always be the best option for you.
Jason Murphy, co-founder of Chest, said: ‘If you’re younger, you may want more long-term growth rather than an overly cautious fund.
‘If you’re older, check you’re not taking more risk than you’re comfortable with.’
Most providers let you switch to a different investment option online in a few clicks.
Knowing which fund is best is not always straightforward. Consider getting professional financial advice if you are not sure where your pension should be invested in order to maximise returns.
Remember that? Tracking down old pensions from previous jobs is a great way to boost your pension pot
3. Track down lost pension pots
According to the Pension Policy Institute, there are approximately 3.3million pension pots forgotten about or lost.
To put this into cash terms, there is about £31billion in lost pensions hard-working workers have no clue about or cannot locate. As more people switch jobs more frequently, the number of old pensions…
Read More: Five steps to protect your pension after Rachel Reeves’ salary sacrifice tax