8 Reasons Your Pension May Not Be Fit for Purpose
For most people, their pensions are likely to be their primary source of income in retirement. With average life expectancy in the UK rising all the time, pensions will have to fund our lifestyles for an even longer period. With this in mind, it is crucial that all pensions are fit for purpose and are in the best possible shape to provide the retirement lifestyle you hope and expect.
We have found, time and again, that many pensions are simply not fit for purpose and are on course for failure. It is imperative that these issues are addressed as soon as possible to stand the best chance of achieving your retirement goals.
In our experience, there are eight key reasons that pensions are unfit for purpose.
1. Poor value for money
Many people are paying higher pension charges than necessary. The major reason for this is because many people took out their pension before pressure from the government and market forces pushed the costs down. Furthermore, increased automation slowly heralded an era of more competitive and better value charging structures.
Typically, older pensions didn’t have their charges reduced, meaning many people are left paying over the odds. Charges can have a huge impact on the eventual retirement income that can be drawn from a pension. The power of compounding means that even small savings in charges now can lead to huge increases in income at retirement.
Many older pensions also have very complicated charging structures with additional (and often hidden) charges. This means that deciphering what is being taken out of the pension in charges is often very difficult.
Newer pensions can be both cheaper and much more transparent, allowing your pension to grow faster and providing the transparency you deserve.
2. A lack of attention
A large number of people are reluctant to review their pension as they are seen as complicated and retirement is often perceived as being a long way off.
Although successive governments have tried to simplify pensions, they remain incredibly complicated with different rules, options and guarantees. Understanding these complexities is one of the key challenges when it comes to getting the most from your pension.
By their very nature, pensions are a long-term investment. People lead busy lives and their pension, which may be years or decades away from being used in retirement, rarely gets to the top of their priorities.
It is crucial to review your pensions as soon as possible as each year that goes by without a review could be very costly in terms of lost income in retirement.
3. Poor investment returns
Some pensions have produced consistently poor investment returns. All pensions invest in one or more pension funds. These funds invest in a range of assets and try to provide a good return for the pension holder.
Some pension funds are excellent, providing consistently strong returns, year after year. Others are rather average giving returns that are nothing to write home about. Some are frankly awful and can be really damaging to the people unfortunate enough to have their pension invested in these funds. Such funds may lose significant sums and leave people with a pension that will not provide sufficient income for their retirement.
It is important to review your pension fund performance regularly and only entrust the best fund managers with your hard earned money.
4. Incorrect risk levels
All investments (including pensions) carry an element of risk. It’s important not to take on too much risk but on the other hand, the more risk you can accept, the higher the long-term returns are likely to be. This is why it is really important to get a thorough risk assessment completed.
Once this has been carried out, an investment portfolio can be constructed to match this risk level and be tailored perfectly to your needs. This means you will have a portfolio targeting the best possible long-term returns but not at the expense of taking on too much risk.
Unfortunately, in many instances, investors don’t have a proper risk assessment and are just invested in a ‘default’ pension fund. Some get lucky and their fund just happens to be right for them, but many are left with a pension portfolio that far from ideal.
5. No expert oversight
Reviewing a pension regularly is crucial to its long-term success. Without keeping an eye on how your pension is performing, it can start to under-perform.
Most investors simply do not have the time or energy to keep their pension under close review. Even those that do may be missing out by not having an investment expert advise on the best strategy. By having a qualified investment professional give ongoing advice, many pensions can be worth significantly more at retirement.
The power of compounding means that even small increases in annual performance can lead to huge gains in retirement income.
6. A lack of joined-up thinking
Often, people have a large number of disparate pensions that can become hard to manage.
This can cause problems because they receive different valuations and documentation at different times of the year from each pension provider. In many cases, it can become almost impossible to have a good overview of their total pension position at any point in time. In addition, trying to manage a successful investment strategy across different pension companies is incredibly challenging.
These complexities can often be simplified by consolidating a number of pensions to a single policy. Care needs to be taken to ensure this is the best option, but if it is, it can lead to clearer, simpler reporting so you know exactly where you are at all times.
7. Poor service and outdated technology
Just like in all industries, there are pension companies that provide a really good service and others that are very poor. Some offer great information, easy to understand paperwork and respond to requests quickly. Others take an age to respond and never present information very clearly. Poor service from pension companies can leave investors feeling confused and ill-informed about their pension and not in a position to take the necessary action.
In addition, some pension companies employ the latest technology, have excellent interactive websites and automated systems. By contrast, others have systems based on outdated technologies and can often take weeks or months to provide even the most basic of information.
8. Poor investment strategy
The money invested in many pensions is not properly diversified with money often invested in a single pension fund that could be invested in a single type of asset. This can be dangerous and leave investors vulnerable to big falls in the value of their pension.
By spreading investments across different types of assets, not only can risks be reduced, but returns may also be increased. This is known as ‘asset allocation’ and studies have shown this to be even more important than fund selection or timing the markets when it comes to getting the best returns.
By employing a properly diversified investment strategy, investors can ensure their pension has the potential for strong gains as well as minimising the risks they are exposed to.
It’s really important you review your pensions regularly to see if they fail on any of the issues highlighted in this article. If they do, this could directly impact your retirement lifestyle – the lifestyle you might be living for 30 or more years.
Alternatively, if you think you might benefit from an independent assessment and review of your pensions, please get in touch with a member of the NorthStar team.