9 things to learn about pensions from ii customers

Nine thousand people answered our call for information about their experiences of retirement or their plans for it (or lack of them) in the latest Great British Retirement Survey (GBRS).

Alice Guy, interactive investor’s head of pensions and savings, published many of the valuable insights in the 2023 survey, but the data is an Aladdin’s cave, and diving back into the results has yielded nine tips on pensions and retirement from interactive investor customers.

Respondents cover subjects from investment funds and financial planning to the psychological impact of this new phase of life.

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“Keep it simple - index funds only. Keep costs down.”

ii customer and contributor to the GBRS 2023

As this investor says, there’s a lot to be said for simplicity. It’s easy for your investments to end up in some kind of Gordian knot if you hold too many. Rather than diversification, you end up achieving “diworsification” by overlapping across asset classes, regions, company sizes, and investment styles.

While there’s no right number of funds to hold, you want your investments to be manageable, and if you hold more than 20 funds, it’s probably time to review and refine.

It’s also easy to overlook costs associated with a pension, and while fees don’t generate as much excitement as investment returns, they ought to because overlooking their impact could mean a bigger chunk of your life savings than necessary is eaten up by them.

Generally, funds tracking an index (also known as passive funds) charge lower fees than actively managed ones, where you are paying an experienced fund manager to handpick stocks. Index funds such as Vanguard LifeStrategy 80% Equity or Vanguard LifeStrategy 100% Equity, which are both part of ii’s Quick-Start funds range, cost 0.22% and invest in a range of in-house funds tracking global markets. These two could be considerations for those who want to keep costs to a minimum.

Not everyone will be satisfied owning index funds, and some adventurous investors prefer to take their chances with a fund manager who might outperform the index. Ultimately, it’s your call, with much depending on your risk appetite, knowledge, and objectives.

Don’t forget to consider how much you are being charged by your investment platform too. For example, interactive investor charges a flat fee on its self-invested personal pension (SIPP). This means that however big your pension grows, the charge remains the same. If you are charged a percentage fee by your platform, as your pot grows, so do the charges.

“Lower-paid workers need to understand that the small contributions under auto-enrolment are unlikely to be sufficient to fund a good retirement without extra action.”

ii customer and contributor to the GBRS 2023

This customer points out an important but inconvenient truth that the current 8% auto-enrolment minimum, i.e., what you and your employer contribute to your defined contribution (workplace) pension in total, is unlikely to be enough for most people to enjoy a comfortable retirement, particularly if they are not high earners.

I’ve written before about my fear about auto-enrolment, which was introduced over 10 years ago, and how people could be deceived into believing that their employer and the government are somehow acting in loco parentis, and that the 8% level has been chosen because it is sufficient for a decent retirement. The reality is that the responsibility of ensuring you are saving enough for the future rests with you alone.

So, what auto-enrolment level is more likely to provide a comfortable standard of living in retirement? Alice Guy says: “In a potentially lower-growth world, we think it’s time to look at minimum pension contribution levels again and consider increasing minimum level of above 8% to around 12% overall contributions, with the ambition to rise to 15% in the future.”

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You may feel that you could be waiting in vain for the government to review auto-enrolment rates. But you can take action to help yourself by finding out whether your employer offers contribution matching or by upping your own contribution rate.

“Many people do not think about it early enough.”

ii customer and contributor to the GBRS 2023

Starting a pension when are young makes sense if you can afford to do so, mainly because of the amazing power of compounding, which accounts for most investment growth.

If you don’t start paying into a pension until you are 30 or 40, you must save much more each month to compensate for not putting money aside in those early years. Having said that, it’s never too late to start saving money in a pension, so don’t despair.

Even if you start paying into a pension early on in your working life, it’s important to monitor what’s happening to your money over the years, in case you need to intervene to make changes, and to do some financial planning. Sleepwalking into retirement could result in a painful wake-up call when you realise that you haven’t saved enough by the time you want to step away from the daily grind.

“More emphasis should be placed on the psychological impact of ‘retirement’ on mental health. I am a chartered financial planner, and many consumers are unaware that it can be a shock to the system.”

ii customer and contributor to the GBRS 2023

This customer makes an interesting point, and this issue seems to be a seldom-discussed aspect of retirement planning. People often yearn to step away from their 9-5, but haven’t always thought about how they will spend all those free hours, and how they might adjust to losing the identity associated with a high-status role, or a job where they had a lot of responsibility.

I’ve also encountered people who have struggled to find a “new normal” with their partner after years spent at the corporate coal face. If you are getting close to retirement, spending some time thinking about potential new routines and taking a 360-degree approach to retirement planning could ease your transition.

“My friends underestimate the amount they have to have in a pension pot to retire comfortably.”

ii customer and contributor to the GBRS 2023

It may be shocking when you realise the sum you need to have in a pension to enjoy even a basic standard of living in retirement.

The PLSA Retirement Living Standards are a good starting place if you’re trying to work out the amount of money you are likely to need. The latest PLSA estimates are due before the end of the year.

“Make sure you don't run out of money. Try to take only the natural yield.”

ii customer and contributor to the GBRS 2023

Running out of money in retirement is something we all want to avoid. In the Great British Retirement Survey, running out of money was a major concern for 38% of respondents.

For investors going into drawdown, rather than selling investments to fund retirement spending, they live off the income the investments produce, known as the natural yield. This can be a sustainable way to take pension income. It is vital to plan how you will take income from your pension.

“It is not a binary event anymore that suddenly happens one day. It is more a transition from one primary source of income to another over a longer period, for example, from employment to drawdown or an annuity income, etc.”

ii customer and contributor to the GBRS 2023

The nature of retirement has evolved, and your own might be more of a phased retirement than a hard stop. For example, you might prefer to reduce your hours rather than stop work altogether. One of my uncles chose to keep working after he reached state pension age. Happily, his decision was based on his own personality and preference rather than financial necessity.

Educating yourself as much as possible about how much you need to save, and your pension income options means you are more likely to be able to choose the form your retirement will take rather than be forced to accept an uncomfortable fit.

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“My retirement age is 67, I am doing a physically demanding job and with eight years to go, I am already wondering if I shall manage it.”

ii customer and contributor to the GBRS 2023

It is sad fact that people face health challenges or need to step in to care for loved ones before they reach retirement age. As reported in the Great British Retirement Survey, the average healthy life expectancy is only 63. Alice Guy says: “We think the government should consider introducing earlier state pension entitlement for those with age-related health problems.”

In the meantime, consider saving money into an ISA as well as a pension. If you’re forced to retire early, ISAs are accessible at any age, so you might be able to rely on your ISA savings and any private pension funds (accessible from 55, rising to 57 from 2028), until you receive your state pension.

“Pay into your children’s pensions from an early age if you can afford to.”

ii customer and contributor to the GBRS 2023

If you can do this, it can be a huge advantage for your offspring. Depending on investment returns and how much you contribute, it is estimated that your child(ren) could have as much as £1.3 million by the time they are 60. Specialist writer Faith Glasgow explains how in this article on child pension millionaires.