I know this is The Times, and most readers here are smart, savvy and financially literate in their professional lives. But one thing I’ve learnt, after years of talking to people on the street and in boardrooms, is that pensions are still a mystery to far more people than you might expect.
In fact some of the most impressive, high-achieving people I know have quietly sidled up to me at parties to ask questions about their pension that surprise me in their simplicity. Not because they’re foolish but because no one ever really taught them the basics. And because pensions are one of those topics people feel they should already understand, many are reluctant to ask for fear of looking ignorant.
I’m here to say this plainly. Starting with the basics matters, even if you’re successful, good at your job and earning well. In fact, most especially then.
I’m a big believer in practical foundations and helping people learn without embarrassment. So today I want to walk you through five simple things you can do with your pension that many people don’t realise but absolutely should.
1. Where your pension is (and how many pots you have)
The first surprise is just how many pensions you may have accumulated over your working life. Every job you’ve had since auto-enrolment was introduced in 2012 probably came with a pension pot attached. Eligible workers pay in a minimum of 3 per cent of their salary and employers pay in at least 5 per cent. And unless you’ve actively done something about it, those pots are all still sitting there, quietly doing their own thing.
I regularly meet people in their forties, fifties and sixties with four, five, or more separate pension pots that they’ve long forgotten about, spread across old employers and different schemes. Some are being invested sensibly. Some are languishing in expensive, poorly performing default funds or in “standard” settings agreed by an employer years ago that may no longer be appropriate. And some have been ignored for a very long time.
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You can’t make good decisions about money you aren’t really in control of. So the first job most need to do is simply to take stock. Find out where your pensions are, how much is in each pot, and what type of scheme each one sits in, whether that’s a master trust, a group personal pension or something else entirely.
Until you do that, everything else is guesswork. Hunt them down and make a list. Seriously. Then, once you’ve worked through the rest of this checklist, decide which pension pot you want to consolidate them into. Pick the best all-rounder for you and roll them up. Don’t wait for retirement — get in control now and make your pensions work harder for you.
2. How much you’re paying in fees
Pension fees are one of the great stealth drains on long-term wealth. They don’t arrive as a bill you visibly have to pay each year. They’re quietly skimmed off your balance, year after year, often without you noticing.
There can be a big difference between the fees charged by different pension pots and schemes. Some might be charging about 0.2 per cent of your balance, others 0.6 per cent and some north of 1 per cent. A difference of half a percentage point or so doesn’t sound like much to most people. But over decades, compounded, it can mean tens of thousands of pounds less in retirement.
What surprises people most is how wide the range is. Two pensions can look broadly similar on the surface yet one might be charging three times as much as the other while delivering weaker investment returns. And because pensions feel abstract, long-term and hard to analyse, people tend to scrutinise them far less than things like mortgages, insurance or even mobile phone contracts.
• The exact amount that means you’re paying too much for your investment
So find out what you’re paying in fees on each pension pot you hold and what you’re getting for it. Your pension firm has to show you how your fund has performed over time, after fees. That information exists, even if it’s buried in paperwork most people never read.
Understanding fees and the performance of your investments after those fees is one of the simplest ways to improve your long-term pension growth without taking on any extra risk.
3. How your pension is invested
Some people are taking more investment risk than they realise simply because they’ve never checked what their default fund is invested in. Others, though, are often taking less risk than makes sense for their stage of life because their pension has been automatically moved into lower-risk assets long before they actually plan to retire, quietly reducing its long-term growth potential.
This can happen simply because many default pension funds use what’s called a lifecycle or lifestyle approach to investing. In simple terms that means your pension is set up to gradually reduce risk as you get older, on autopilot. It’s often done by moving some of your pot out of shares and into safer assets such as government bonds, which are less likely to fluctuate in value.
This is done on the assumption that you’ll retire at a particular age and start drawing an income then. Again, this isn’t wrong, it’s just designed to protect people who don’t want to think about investment risk at all.
But the assumptions that these funds make about what you want from your life don’t always match reality. People are working longer, retiring later, moving in and out of work, or planning a more gradual transition into retirement. If your pension starts “de-risking” too early, you can end up being invested far more cautiously than you need to be for many years.
The best thing to do is understand how your pots are invested and choose actively whether you think the approach is right.
You don’t need to become an investment expert to get this right. But you should understand, at a basic level, what your pension is invested in, and whether that actually suits your timeframe and plans for retirement. For many people, staying appropriately invested in growth assets for longer makes lots of sense. And if it doesn’t suit you, it’s usually something you can review and change.
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4. How much you’re paying in and what you’re leaving on the table
When you put money into your pension three things usually happen. First, some of the money comes out of your pay. Second, your employer adds its own contribution. And third, the government gives you tax relief — the tax you would have paid on that income if you had taken it in your pay cheque goes into your pension instead.
In simple terms, for most people every pound that ends up in their pension has cost them a lot less than a pound from their take-home pay. In many workplace pension schemes, increasing your pension contribution also triggers a higher employer contribution, up to a limit. If you miss that, you’re not just missing a tax break, you’re leaving part of your pay behind — truly.
Many miss out on this, simply because they don’t fully understand how the system works. They stick with the default minimum contribution. They don’t realise their employer would pay more into their pension if they put a little more in. Or they underestimate just how powerful tax relief becomes as their earnings rise.
Pensions aren’t just about discipline or good intentions. They’re about understanding the rules of the game and playing it smart. Used properly, they are one of the most efficient ways to turn today’s earnings into your future epic retirement.
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So the key question is “am I making the most of what’s on offer?” If you don’t know, start by downloading your pension scheme booklet and actually having a read. I know, it doesn’t sound like fun, but once you’ve done it things start to click.
And if you can consolidate into one chosen pension plan, even better. Having fewer pots really does make decisions easier and gives you a much clearer sense of what’s going on with your pension.
5. What your pension is for
This isn’t something most people think about until they pass 50, but leaving it that late is a mistake. Pause and think about the job your pension needs to do for you across your lifetime.
For some a pension is the tool that allows them to ease off work in their late fifties, moving into a more flexible, part-time working life. For others, it’s something they won’t touch until they hit state pension age (66, although this will hit 67 by 2028), when they retire fully and use it to top up the state pension.
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Some plan to use part of their pension, including the 25 per cent tax-free amount, to fund a big first-year retirement trip. Others use it to pay down the last of the mortgage as they approach retirement, taking the pressure off monthly costs.
Most people haven’t really thought this through at all. A pension makes much more sense when you stop thinking of it as a distant pot of money and start seeing it as a tool that supports the life you actually want to live. Go on — I dare you.
Bec Wilson is Times Money’s retirement columnist and the author of How to Have an Epic Retirement