When you create a retirement plan, you will likely think about the kind of lifestyle you want to lead and the important goals you want to achieve later in life. This could be anything from travelling the world to finding new hobbies or supporting your loved ones financially.
To fund this ideal retirement, you may need to make important decisions about how you manage your pension. Unfortunately, poor choices could affect the amount of savings that you are able to accumulate, and this may mean making sacrifices to your retirement lifestyle.
However, failing to make any choices at all could be equally as damaging as poor choices, and many people fall into this trap.
According to Aviva, millions of people aged between 32 and 40 in the UK are likely to be pension “triple defaulters” who do not exercise control over their savings.
Pension “triple defaulters” fail to make important decisions about their retirement savings
The amount that you will be able to save in your pension before you retire depends on several factors including:
- Monthly contributions
- Investment choices
- Your planned retirement age.
When you enrol in a pension scheme, your provider will typically set a default retirement age and invest your savings in a default fund. Your monthly contributions are also set automatically based on the legal minimum, plus any additional voluntary contributions from your employer.
However, you normally have control over how much you contribute, where the funds are invested, and what your chosen retirement age is.
A pension “triple defaulter” is somebody who never makes any changes to these default settings used by their pension provider.
If you are part of this group, you could be missing out on opportunities to grow your pension savings. Fortunately, by taking a more active approach, you may find it easier to achieve your perfect retirement.
Read on to learn how you could boost your retirement plan and avoid becoming a triple defaulter.
A 1% increase in pension contributions could boost your pension pot by more than £10,000
In the 2023/2024 tax year, the minimum total pension contribution including tax relief is 8%, with at least 3% coming from your employer.
Your default contribution may be more than this depending on the scheme that you are enrolled in. That said, your monthly contributions may not align with your own financial plan if you have never changed them.
In some cases, the default contributions may not be high enough for you to meet your retirement savings goals. Fortunately, a modest increase in your pension contributions could significantly boost your pension pot later in life.
Indeed, according to Creative, somebody aged 50 earning £50,000 a year and making a 3% pension contribution would have £31,367 in their pension pot at age 67.
Yet, if they increased their monthly contribution to 4%, they would have £41,823 at age 67.
As such, if you simply leave your contributions at the default level, you could be missing out on a valuable opportunity to grow your retirement savings.
It’s also worth remembering that your employer may agree to match increased contributions and you may benefit from tax relief on wealth that you pay into your pension.
Changing your pension fund may help you generate more growth
Your pension provider invests the money you pay into your pension, so your savings potentially grow over time. While they choose a default investment fund for your savings, most providers offer multiple alternative options.
The default fund may be the most suitable choice if it aligns with your goals, but that’s not necessarily the case. As such, it’s important to consider the potential growth and level of risk associated with different investment options and decide which is right for you.
For example, Nest offer five different funds with varying levels of growth. The average annual total performance of their “higher risk fund”, as of September 2023, was 8.7%.
However, you may have missed out on this potential growth if you stuck with the default “retirement date fund”, which only showed annual total growth of 7.7% in the same period.
Conversely, if you’re close to retirement, it may be beneficial to reduce the level of risk you adopt, even if it means you see less growth. In this case, their “lower growth fund” could be more suitable.
As well as the growth and the level of risk you adopt, you may also want to consider how your investments align with other priorities. For instance, if you value sustainability, many pension providers offer ethical funds.
Moving your savings into a different fund that’s more suited to your financial plan could make it easier to reach your savings target and achieve your desired lifestyle in retirement.
The default retirement age might not align with your own financial plan
You can normally start drawing flexibly from a defined contribution (DC) pension from age 55. However, many people continue working for longer than this before they retire.
Each pension provider sets their own default retirement age for you. For example, this may be age 66 (the State Pension Age, but rising to 67 and eventually 68 for those born after April 1960).
Yet, you might plan to retire at a different age. For instance, you may want to finish working earlier in life so you can enjoy your retirement for longer. Conversely, if your desired lifestyle in retirement is likely to be more expensive, you may decide to work for longer so you can continue building your savings.
It’s more difficult to see whether you are on track to reach your savings goals if your retirement age doesn’t match your plans for the future. You may also face issues if you try to draw your pension earlier than your provider expects you to.
That’s why it’s crucial to consider when you want to retire and update your retirement age if it is different from your provider’s default option.
Get in touch
If you want to take a more active approach to your retirement savings, we can offer some guidance.
Email firstname.lastname@example.org or contact your adviser on 020 3828 8100.
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.
Workplace pensions are regulated by The Pension Regulator.