Private pensions are often overlooked in favour of more proactive forms of financial liquidity, and yet, these programmes are absolutely essential once you reach the age of retirement. Unfortunately, many individuals only learn to appreciate this fact after it is too late. This is why understanding the means by which you can maximise the effectiveness of a private pension is crucial. Let us examine five takeaway points.
Knowing the Type of Pension You Possess
There are two types of pensions; defined benefit and defined contribution. Defined contribution schemes are more common, as both the pension holder and the employer will contribute to these funds. Defined benefits are slowly being phased out and these are intended to provide you with a set annual source of income until death. Defined contribution plans require a more hands-on approach, as you bear the brunt of any investment risk as opposed to your employer.
What Percentage is Being Saved?
The majority of private pensions are required to set aside eight per cent of your annual salary. While this might vary between employers, it could also not be sufficient upon retirement. Most experts recommend trying to save up to 12 per cent on an annual basis. This will provide you with more “breathing room” in the future.
The Types of Investments
This is another critical point, as the performance of any private pension relies heavily upon its underlying investments. Not only should these assets be providing steady rates of return, but they must represent low-risk strategies. Most default pension plans employ global index trackers; providing a predictable ROI while requiring less than 0.5 per cent of the total fund. While there are indeed more liquid options, always remember to balance the risk with the potential reward.
The Number of Private Pensions
Those who have been employed by multiple different companies are likely to have more than one private pension. It often makes sense to conglomerate these smaller contribution schemes into a single programme. Not only will it be much easier to monitor performance levels, but you will no longer be forced to interpret multiple performance reports; offering a greater sense of clarity.
Dealing with Life Events
There is always room to improve an existing private pension; especially if you hope to keep abreast of changing scenarios. Some examples here include:
- Having children
- Deciding to get married
- Going through a separation or divorce
- Changing employers
Who would be entitled to the benefits in the event of your death? How are your current investments performing and should they be modified? How is the private pension dealing with annual rates of inflation? These are some of the questions which should be asked on a regular basis in order to remain informed. It could also be wise to consult with the Pensions Advisory Service if you have additional concerns. Embracing a proactive stance is the best way to make the most out of any private pension.
When looking at the modern-day private pension options, self-invested personal pensions like Moneyfarm’s have become extremely popular. By combining all your old pots for free you can easily manage your pension and make sure you’re on track to meet your financial goals. The investment advice given to you is fully reflective of your investor profile based on your personality, financial background, and appetite for risk.