To say that I often come across clients neglecting their employer pension benefits would be a huge understatement. In fact, in my twelve years of giving advice I have only found a handful of clients that take an active interest in the management and well-being of their employer pension benefits.
I guess keeping up with life, careers and the kids takes its toll on certain things, one of them being financial planning and pension benefits. In some ways I understand it: we are busy, we assume that an employer’s pension scheme is a good place for our pension investments, and also it is something that we’ll deal with when we have time.
“By the way,” you might say, “what do you mean, ‘neglect’? I am making my contributions every month, aren’t I?”
So what do I mean when I say “neglect”? To understand my comment, one must first come to the realisation that most employer pension schemes are not necessarily set up to provide the ideal conditions for growth of the underlying investments. They are created to fulfil the requirement of providing an employer pension scheme, to have an efficient and uncomplicated administration system and to reduce cost.
The net effect of these employer driven factors are:
- Employer schemes typically have limited underlying investment choice.
- You will receive infrequent or no access to valuations.
- You will receive no advice as to the suitability of the pension in relation to the rest of your financial affairs.
The mere fact that employers have these pension schemes and contribute towards them on your behalf is great, but it is up to you to make sure you receive maximum benefits when you leave.
This is what you need to do:
- When you change jobs, do not leave your accrued pension benefits with your old employer. Years may pass before you get time to look into their progress and by then a lot of valuable time and growth will have been lost.
- Transfer the old pension to your new employer’s scheme, or transfer it to your own personal pension, where you can keep an eye on it. These days, people change jobs so often that it makes sense to create your own pension, one that can receive these benefits every time you change roles.
- Spend some time on researching and deciding what the underlying investment portfolio should look like. A diversified portfolio, spread into various regions and asset classes, will ensure that you reduce risk and benefit from exposure to potential growth areas.
- Understand the risks involved. Investing in a single or a few individual shares carries significantly more risk than, for instance, investing in a broad index tracker. It is very important to understand your personal capacity for loss as it is inevitable that the market – and with it, your emotions and confidence – will go up and down.
- Take the long-term view. Most of us will not have access to our pensions until at the earliest age 55. This means that the short-term returns or losses should not overly influence your investments strategy as you will only need to start relying on the pension at retirement age.
- Review the investment portfolio at least annually. Monitor the growth and reconsider whether the original investment choice/funds are still appropriate, considering the changes that took place during the preceding twelve months.
- If you don’t have the time or the interest to manage your pension yourself, appoint an adviser to manage it on your behalf. They will charge a management fee for doing so, but this should mean that they will guide you in taking care of your valuable assets, while removing the hassle.