Understanding Your Pension: A Guide for Busy Professionals

Pensions can sometimes be shrouded in mystery. All companies must offer them by law, but final salary pensions are becoming a rare thing. So, most people leaving an employer and heading into retirement probably won’t receive a final salary company pension and due to cutbacks, the gold watch is probably off the cards too.

The good news is that if you are self-employed, you can put money into a private pension and simply reap the rewards. You can also save into a private pension in addition to your company pension.

One Pension or Many?

You are not restricted to a single pension. Also, even if you have company pensions with several past employers (or a current one), private pensions are allowed too.

For the 2020/21 tax year, up to 100 percent of your income can be paid into a pension (up to a maximum of £40,000). Employers also add contributions or match part of your contributions to a pension. However, you can only claim tax relief on 100 percent of your income – any extra contributions are subject to tax.

What’s a Pension Pot?

A pension pot is a common way to refer to a pension from a provider. It keeps the terminology simple to remove some of the general confusion that’s existed with pensions in the past.

All it means is the monies invested in a pension plan on your behalf. So, you can have multiple pension pots – each with a different provider – and that’s perfectly fine. However, it can become a pain to manage if you decide later that you want a target-date fund (to reduce investment in stocks the nearer you get to retirement) or to use some other strategic allocation.

Why is that?

Each provider will have a different range of funds or pension solutions for your pot. Therefore, it becomes next to impossible to create an overarching asset allocation plan because of how spread the pension pots may have become.

Furthermore, due to the limitations of investment strategies or funds available at a given pension plan provider, it may be impossible to reduce risk or make other changes to your satisfaction. You might be able to invest in a low-risk fund in one pension pot but only a medium-risk one in another pension pot, so reaching the target risk level or desired asset allocation is complicated.

It’s an unnecessary level of complication that adds fees and time to figure it out while not necessarily adding incrementally to the return.

How Much Will Your Pension Be Worth?

Figuring out how much you have in pensions dotted all about is challenging. Using a pension calculator is not a bad idea to get a sense of how much is invested across multiple pension pots.

Willis Owen’s pension calculator can help and provide useful information to investors wanting to get a better handle on their pension. The three fund options for how a single pension pot would be invested keep it simple too.

Where Should Your Intent Be?

For busy professionals, there’s simply not enough time in the day. Then when the weekend comes around, you need to decompress and relax, but there’s still plenty to sort out that there was no time for during the week.

Getting your head around investments is tough. It requires considerable research, monitoring, and regular updates, which many professionals can’t fit in when their priorities are doing the best job possible at work and being present at home on the weekend. Using simpler investing solutions, however, allows professionals to gain control.

Projecting Ahead in Life

With any investment, it’s always unclear what the returns will look like 10 or 20 years into the future. Capital is at risk. That said, it’s still worth performing some basic planning to project forward for how much a pension pot may become a couple of decades later.

Caution is warranted here though. It’s better not to believe in optimistic forecasts and instead, sensibly plan for low to mid return levels while keeping investment costs as low as is practical. Let the benefits of tax-free investing in a pension pot work in your favour and aim toward higher pension contributions with lower fees, rather than the other way around. That way, you’re less likely to make a major error in your estimates of the future.