Blackadder’s Baldrick was famous for having one. But do you have a plan, cunning or otherwise, for your retirement age? And have you told your pension provider?
Despite increases in the state pension age, many savers – especially in workplace pensions - have kept their pension’s ‘default retirement age’. This is typically set at the date of entering a pension scheme – and often to the age of between 60 or 65. This default retirement age acts as a guide to when you’ll take your pension savings but you can change it at any time. Failing to update your default retirement age to reflect your own plans could cost you money.
To understand why the lack of an accurate retirement age can be costly, you need to consider another default – the ‘default investment fund’. These are the funds into which savings from a workplace pension are invested - unless you state a different investment option to your pension scheme.
Many workplace pension savers have their savings invested in their default investment fund, often for very valid reasons. It could be perfect if you don’t feel confident making your own investment choices, or if you simply don’t have the time to do so.
The default investment fund will work best when it’s focused on a retirement age that’s right for you too, and crucially when this age is known to your pension provider.
Before the retirement age noted on pension records, your default investment fund will automatically move your pension money from higher risk investments to lower risk investments. This can be as early as 15 years before you retire, 10, or sometimes eight – it all depends what type of pension scheme you’re in. This process is designed to reduce the impact on your pension money from the effects of any sudden shifts in the value of your underlying investment. For example, you wouldn’t want all your pension savings to be in higher risk investments the day before you retire, only to see them drop in value by 10% in the wake of some unexpected economic shock. As we saw in March 2020, when stock markets fell heavily as investors reacted to the outbreak of Coronavirus. It’s important to have a good think about how you want to take your pension savings too – it could be as a cash lump sum from age 55; taking an income and leaving the rest invested; or even preparing to buy an annuity. It’s your money and your plans.
If the assumed retirement age of your pension is the same as the age at which you want to retire, then you don't have to worry about this.
But, if your pension has an assumed retirement age that’s too young, your default investments will be moved to less risky investments too early - missing out on possible investment growth. Similarly, if the assumed retirement age is too old, the investments will be moved too late - exposing your money to heightened risk. Neither would be a good outcome.
It’s very possible you won’t know where your pension money is invested, or what your pension assumes to be your retirement age. The good news is that by simply calling your pension provider, or logging on to your online pension account, you should get the answer to both of these questions.
Once you know where your pension money is invested and what your assumed retirement age is, you’ll be able to decide if things are aligned. If not, you’ll be better placed to act.
Changing your investment funds or your default retirement age shouldn’t cost money. And a change in one direction can normally be changed back, usually without a fee. But making changes - to either your investment funds or target retirement age - could benefit your retirement plans and should be properly considered. See this month’s article on financial help for information about who could support you with this.