The pension MOT: How can I make the most of my workplace pension?

PUBLISHED: 03:44 EST, 2 February 2013 | UPDATED: 13:17 EST, 8 February 2013

For many people, contributing to a company pension will be the only form of saving they can stretch to. Here we explain how you can make the most of yours.

As gold-plated final salary schemes fall by the wayside, defined contribution (DC) pensions have become the default option for most workers saving into pensions - including the millions who will be automatically-enrolled into pension schemes for the first time over the next five years.

The spotlight is now being shone on whether DC schemes are value for money and an adequate vehicle for your savings. The Office of Fair Trading and The Pensions Regulator have announced they will probe workplace DC schemes to ensure workers are getting a good deal.

But there are steps you can take now. This is Money and the National Association of Pension Funds (NAPF) have put together this guide so you can give your own pension the once over.

Pensions MOT: How much should you be contributing? And how do you find out your scheme charges? Use our guide to give your pension the once-over.

How much should I be contributing to a pension to better prepare for retirement?

NAPF urges people to 'contribute as much as you can' and make sure you get the best out of your employer. Typically, an employer will match or, even better, your contributions. For example, work could contribute 6 per cent provided you contribute 3, or 8 per cent if you contribute 4.

You should aim to put in as much as you can afford and we have a dedicated guide on contribution levels here.

In terms of providing a comfortable retirement, an oft repeated rule of thumb is that total contributions should equal halve the age at which you begin to contribute. If you start paying in at age 28, you need to pay in 14 per cent of you salary each year.

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That can seem a lot and it will be up to you to be realistic about what you can afford in light of other financial commitments. But because pension contributions are effectively taken from pre-tax income, an increase in your contributions may have a smaller impact on the amount you take home than you might think.

Online calculators are available that allow you to work out what impact upping your contributions will have on your pay packet.

WHAT IS A DEFINED CONTRIBUTION PENSION?

Workers contribute a proportion of their salary each month, which their employer usually matches or betters and it is then invested.

Unlike defined benefit schemes - such as final salary - there are no guarantees as to how much it is worth come retirement.

The pension pot you end up with upon retirement can be used to buy a retirement income, such as an annuity.

How much should my employer be contributing in a 'good' DC scheme?

Soon all employers will have to contribute into a pension for their workers under the auto-enrolment scheme. The process has begun and large employers already do this.

The minimum total contributions for workers auto-enrolled so far is 2 per cent, but this will rise to 7 per cent in 2017 and 8 per cent in 2018. Of the eventual 8 per cent - 3 per cent comes from the employer.

This is supposed to represent a base level for pension saving, so employers that already run a scheme for staff are likely to contribute more than this.

The Pension Quality Mark (PQM) - a benchmark for DC pension schemes - says that total regular contributions should be at least 10 per cent, of which 6 per cent comes from the employer.

But, NAPF points out that good schemes are not all about contributions, saying they should also been well governed, with regular communication that is easy to understand.

You can get details on contributions levels and investment from your employer. Those in large companies should contact their HR department to find out how to express these concerns; while those at smaller firms should ask their employer to put them in touch with the administrators or trustees responsible for the scheme. (See below)

How should my pension pot be invested?

This all depends on how much risk you are willing to take and how long it will be before you retire.

Typically, those with decades to go before they retire should be prepared to take on more risk because they have more time for their money to grow and recover from market shocks. It can therefore make sense for younger workers to have higher exposure to riskier assets, such as equities.

Those approaching retirement need to preserve the value of their pension pots rather than gamble on market gains. For this reason it can make sense to have higher exposure to low-risk investments, such as in government bonds or cash.

If you are unsure how you wish to invest your pot, NAPF advises that you speak to your employer as they may offer free advice. A good employer would also review investment choices on a regular basis.

Additionally, some schemes may allow workers to choose from a range of different risk-rated funds to invest their money into.

How will I know how much I am being charged for my pension? And how much should I be getting charged?

Pensions minister Steve Webb recently expressed his opposition to the introduction of a cap on pension charges, arguing that industry competition would keep charges down better than a cap.

Total charges for schemes with the Pension Quality Mark are no higher than 1 per cent and these fees should be shown on the annual benefit statement you receive.

Charges for new scheme joiners tend to be lower than they were a few years ago, so NAPF suggests you check whether you are still getting good value for money.

It should also be noted that you get charged more if you stop contributions. Schemes often offer an Active Member Discount (AMD) to those that continue to contribute. This change should be communicated to you clearly if you leave or no longer contribute to the scheme.

How much can I expect my pension pot to grow?

It all depends on how well your investments perform, so figures projecting how much a fund will grow are merely guides.

The Financial Services Authority (FSA) produces standard guidance on what return savers can expect. For years the intermediate projection was 7 per cent a year, but this has been reduced down to 5 per cent thanks to the current environment of low investment returns.

Is it better to be in a large or small pension scheme?

The NAPF says large-scale pension schemes tend to be better governed and deliver better outcomes for savers.

Some small pension schemes can come with higher charges, whereas the scale of larger schemes means charging may be kept lower.

How do I know if my scheme is adequately monitored and governed?

This depends on what kind of scheme you are in. If you are in a trust-based defined contributions scheme, it is governed by trustees who are personally liable if anything goes wrong. These trustees have a certain level of expertise that enables them to carry out their role.

They should be regularly reviewing the scheme to ensure they are getting a good deal.

There is no requirement for governance to be in place if you are a member of a contract-based scheme, in which a firm employs a pension provider - typically an insurance firm - to run the pension scheme.

However, NAPF said it expects that a good employer would review the scheme regularly and set up a governance committee, taking scheme members' views into account and monitor performance, administration and communications.

Those pension schemes that look after members to this standard have the Pension Quality Mark.

Saving

What are my options if I don't think my pension scheme is working in my best interests?

If you have concerns and want some expert guidance, the best option open to you is The Pensions Advisory Service, which provides information free of charge on pensions.

If you don't feel your pension scheme is working in your best interests, raise the issue with your employer or a trustee in the first instance.

If you are still not happy with how things are being handled, you should have the option of transferring your money, such as into a Self-Invested Personal Pension (SIPP) or a stakeholder pension.

But you should note that you would be missing out on employer contributions, and may have to pay transfer charges to move your pension pot.

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Thanks for the information. I will now go back to my pension fund and ask what medical conditions qualify for enhanced pension payments

- annd , Sutton Coldfield, United Kingdom, 07/2/2013 17:47

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I have a question to ask. If you take a works pension early can you still shop around for the best annuity and also is it advisable to tell your current pension company when you ask for a pension forecast for retiring early that you have certain medical conditions. I would be grateful for any advice - annd , Sutton Coldfield, United Kingdom, 06/2/2013 17:17 Yes you can (and should) shop around. It may be worth going to an annuity bureau. You should fill in a medical form and if you have a 'qualifying condition' you will get a better rate.There are some less well known providers that offer the best rates for 'impaired life' annuities. A medical condition won't change any pension forecast you get before retirement as these are based on standard factors.

- PompeyLiz , Hampshire, 06/2/2013 17:40

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- annd , Sutton Coldfield, United Kingdom, 06/2/2013 17:17

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Osborne is taking away the State Second pension 1.6%...NEST will see 2% used to start off, between company,state and worker. You will also pay the spreed in buy selling the units, the spreed in buying sell the shares held in the pension fund. The 0.5% stamp duty on buying and selling the shares plus the yearly fee. Even with NEST millions can not join this year, part-time workers do not have to be offered it so millions more will miss out. All these workers at the same time miss out on the state second pension...This is taking far more than it is giving in help...Just think if todays OAPs with gold-plate pensions are poor how will todays savers saving 2% be rich?.

- Dave , London, United Kingdom, 06/2/2013 11:59

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......But Osborne is taking away the State Second Pension worth 1.6%.Add in the other fees, the spreed in buying and selling.The yearly fee etc and how much are the workers gaining? Did you sell pensions in the workplace in the 80s. It was latter called miss-selling. Dave, London. But going into a group pension scheme has nothing to do with Group Pensions. If anything it means you will need to provide more for yourself. On pension funds within a Group Scheme the buying and selling price is the same so no cost. If say the other costs are an additional 1% (it wont be that high) then it is still only 75p. As for mis-selling, it is hard to say it is mis-sold when the employee will be getting 3% of the salary from the employer which they would not have had had they not joined. Even if you don't agree with pensions, you are turning down money if you dont join. And FYI I was a teenager in the 80s.

- William , Devon, United Kingdom, 05/2/2013 16:41

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Get a job with the council (this workd for teachers and certain NHS roles) and enjoy an easy progression up the career ladder and retire in comfort on a final salary pension scheme that is mostly paid for by taxpayers who can't afford their own pensions. This works especially well if you get promoted a few years before you retire as your pension is based on final salary and not career average. Then having used the fifty thirty rule (over fifty with thirty years service) retire in your early to mid fifties and live a long and enjoyable retirement paid for by someone else.

- peter , wirral, United Kingdom, 05/2/2013 12:28

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If your 1% is worth £25pm and your employers 1% is £25 then the total contribution is £50. The charge at 0.5% is therefore 25p pa (assuming no growth). Clear? Hardly a rip off. - William , Devon, United Kingdom......But Osborne is taking away the State Second Pension worth 1.6%.Add in the other fees, the spreed in buying and selling.The yearly fee etc and how much are the workers gaining? Did you sell pensions in the workplace in the 80s. It was latter called miss-selling.

- Dave , London, United Kingdom, 05/2/2013 10:05

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RM, I hope your comment was a joke becasue if it wasn't then you are seriously misguided. For the interest of clarity you do not lose 25% of your contributions in the first 2 years or so. If your 1% is worth £25pm and your employers 1% is £25 then the total contribution is £50. The charge at 0.5% is therefore 25p pa (assuming no growth). Clear? Hardly a rip off.

- William , Devon, United Kingdom, 04/2/2013 15:42

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As usual we have the 'pensions are rubbish' comments. Bitter experience on my part. My last 10 years working life co-coincided with Brown as Chancellor. My pensions during that time reduced by slightly more than 20% not taking inflation into account. Two of my pensions companies went bust, how can I decide which is a good one? I never trusted pension companies to start with, I don't like the fact that it is not your money and they decide how much you get. I never trusted any politician either. If you trust politicians, banks & pension companies, fine, go for a pension, I would never advise it.

- cornwort , Guildford, United Kingdom, 03/2/2013 17:54

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NEST is starting at 2% and it will be years before it gets to 8% plus. Yet fund managers will be taking 0.5% in fees. So the first year or 2 about 25% will be lost in fees. How is this a good deal for savers? Funny how people still thing that Browns 0.6% tax change was bigger than the Torys 15% pension holiday?

- RM , London, United Kingdom, 03/2/2013 14:29

Click to rate Rating 142

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