Laura Stewart-Smith, Workplace Individual Insight Lead at Aviva, talks about the three questions that come up most about when people in workplace pension schemes ask about retirement saving.
Over the past year we’ve seen an increase in ‘financial housekeeping’ as many people reduce their spending. Financial security has never been more important. And financial education has never been more key in supporting people through their choices.
During my time working in financial education there are three questions I regularly hear when it comes to saving for retirement. So, what are they, and how do I answer them?
1. How much should I be saving?
This is the big one. And yet it’s one of the toughest questions to answer. As a rule of thumb, at Aviva we recommend people should save at least 12.5% of their salary, including any contribution from your employer, but that’s just a guide and it’s not necessarily right — or practical — for everyone.
We offer plenty of online information, tools and guidance — like our retirement planner — to help people better understand and plan for their retirement. The more engaged you are with your pension, the more prepared you’re likely to be for retirement. The consequences of ignoring your pension could lead to a lack of money in retirement for some, or an ever-ageing workforce as people can’t afford to retire.
2. Should I make my own investment decision?
Your pension could become the greatest sum of money you ever have to manage, meaning making an investment decision can potentially be daunting.
Often a pension is the first time that people face this type of choice and, in this case, too much choice can be overwhelming.
To make life easier for pension savers, most workplace schemes offer a default investment choice, in which your money may be automatically invested. This may gradually move your money to lower risk investments as you approach retirement. People who aren’t comfortable making their own investment choices usually stay in this option.
While the default investment is the easiest path, it can sometimes lead to complacency. But that doesn’t mean no decision is a bad decision. Most defaults manage investments in line with your chosen retirement age from start to finish. They can be a good option for you if you have no desire to spend time reviewing investments or taking investment advice. Plus, due to regulatory requirements, default investments tend to have a higher level of scrutiny from trustees and employers to make sure it’s appropriate for the scheme. If you’d like to consider options beyond the default, most workplace pensions will offer a range of funds from which you can choose.
Ultimately, the answer to this question depends on how comfortable you feel about making your own investment decisions. Research carried out on behalf of Aviva found that on average around 70% 1 of people don’t make an investment choice. Of the 30% who do make a decision, nearly half only do so once and don’t regularly review their investment choice.
3. Should I transfer my pension?
Over your working life, you may have had a few employers, picking up a new pension each time. Once you have several pensions on the go, it's easy to lose track of them and they could become more of an annoyance than a reassurance.
After leaving an employer, you may have left your pension pot where it was. It still belongs to you, but the scheme administrators continue to look after it. However, it’s possible to transfer older pensions into a new pension scheme. In fact, the idea of having it all in one place often appeals to many people.
You can generally transfer a pension at any time. However, just because you can doesn’t always mean you should — it’s a big decision and needs careful thought.
It’s important to understand the pros and cons of the new pension in comparison with the old one. You should also be aware of potential pension scams and how to keep your money safe. We’d always recommend getting regulated financial advice before transferring a pension, and some pensions will require you to do this. A financial adviser will look at your full financial circumstances and recommend the best course of action for you. Please bear in mind an adviser is likely to charge for this service, although many pensions allow these charges to be taken from your policy
For more information about pension transfers, read our article on moving your pension to one pot.
Whatever you decide about your pension, remember the value of your policy can go down as well as up and you may get back less than has been invested.
Laura Stewart-Smith is a Workplace Individual Insight Lead for Aviva, she is diploma qualified in financial planning and has spent the last 15 years working in workplace benefits. She is an Aviva spokesperson specialising in employee engagement and financial education and is regularly featured in the media.