Your life is moving on, but is your pension keeping up?

When was the last time you looked at your pension? For most of us our pension is something that rumbles away in the background as life ploughs on. But whether you’re in your 20s or approaching retirement, it’s important to keep checking in.

It’s not just about reviewing your investment performance and contributions, you’ll also need to think about admin and whether you’re structuring your finances in the most tax-effective way.

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From starting your career to reaching retirement, here’s what you need to consider to ensure your pension keeps up.

Starting out

Most people will be auto enrolled on to a workplace pension in their 20s. But while this passive approach is a fantastic way to get people saving early, it’s not a perfect system and, if you don’t actively engage with your pension, you will miss out.

As a first step, Megan Rimmer, a chartered financial planner at Quilter Cheviot, suggests checking how it’s invested. “More often than not, a workplace pension will be invested in a default fund that may not be appropriate to your circumstances. Pensions can't be touched for a good 30 years, so having exposure to higher-risk assets (stocks and shares) is going to be crucial to build your pot over the long term.”

You can normally choose to invest contributions in your own choice of funds, which may be more heavily weighted to shares.

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You should also check how much is being paid into your pension. The minimum required by pension rules is 8% of your qualifying salary (with a minimum of 3% from your employer). It’s a good start, but even if you begin saving in your 20s, it may not be enough for a comfortable retirement and it’s best to pay more in if you can. You should also find out if your employer will match higher contributions.

When you join any new pension, don’t ignore the expression of wishes of form you’ll be asked to complete. This is your opportunity to tell your provider who you would like to inherit your pot when you die – it’s easy to overlook when you’re young but you may forget to come back to it later.

And it’s no biggie if you change your mind about who you name – you can always update it.

Moving up the career ladder

With each new job, you’ll likely get a new pension. It’s important to get the lowdown on each scheme you join, but don’t neglect old pots you’re no longer contributing to – you’ll still be counting on that money when you retire.

And, when you move house, make sure you give your new address to every pension provider you have a pot with to ensure you don’t lose track of any. Don’t worry if you’ve already ‘lost’ a pot – the government’s free pensions tracing service can help you find it.

Getting married and starting a family

If you’ve got married or moved in with a partner – and you would like them to inherit your pension when you die - you’ll need to complete a fresh expression of wishes form for each pension you have, not just the one you’re paying into.

Rimmer says you should also start taking a joint approach to retirement planning. “It is important that both you and your partner have a pension to ensure adequate levels of savings across the family unit,” she says.

If kids come along, one of you may decide to take time out of work. In these cases, the working partner can still pay into a pension on the other’s behalf. Each year, non-earners can pay up to £2,880 into a pension, which will be boosted to £3,600 by tax relief at the basic rate.

Even if you both work, finances can be stretched, with childcare bills often feeling like a second mortgage. But it’s important that you keep saving for retirement – stopping contributions, even for a year, could have a significant impact on your eventual retirement income.

Mid-life review

If you’ve amassed a collection of pensions by mid-life, it’s worth considering consolidating schemes you’re no longer contributing to into a self-invested personal pension (SIPP). With more of your savings in one place, you’ll find them easier to monitor and review. There may well be sizeable savings to make too if you move your money into a modern online pot (which normally impose lower charges than older workplace schemes). Just check whether you will lose any benefits such as guaranteed annuity rates, and what exit fees might be payable, before you switch and factor those into your decision.

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You might also be earning a decent salary by now – and if you are, it’s time to pump as much as you can into your pension, making the most of your £60,000 pensions allowance and potentially carry forward rules if you have a bumper year.

Rimmer adds that if you’re a high earner, there’s an added benefit to topping up your pension. “If you start earning over £100,000 you start to lose your personal allowance (the amount of income tax-free earnings), which carries a 60% effective tax rate. Making a personal pension contribution helps to lower your taxable income and thus stop this happening. Furthermore, if you start earning over £260,000, your annual pension contribution allowance will begin to be tapered, so it’s important you check how much is being paid into your pension so you don't exceed that allowance.”

Meeting mid-life challenges

However, while you may be reaching peak earnings, mid-life has a habit of being unpredictable and you may find yourself dealing with challenges that set your life on a different path. 

Life can often be hectic or stressful, but it’s best not forget about your pension altogether.

• Redundancy – losing your job means tightening your belt, but if you get a redundancy payment, try to keep up your pension contributions
• Illness – pension payments won’t be your first priority if ill health forces you to stop working for a while, but planning ahead and buying protection policies such as income protection and critical illness can give you a financial buffer and ensure you can still meet your regular expenses
• Self-employment – if, at any point in your career, you start up on your own, you’ll lose access to a workplace pension. But try not to put your retirement saving on the back-burner. A SIPP can help you build retirement savings independently of an employer. And while you won’t get employer contributions, you’ll still get the benefits of tax relief on contributions and tax-free growth
• Divorce - splitting finances fairly is difficult and stressful but also crucial. Seek financial advice to ensure both parties leave the marriage with retirement savings in their name. Be sure to update your expression of wishes form too.

The run-up to retirement

The conventional strategy has long been to gradually take investment risk off the table as retirement edges closer. By moving money out of equities into lower-risk bonds and cash, your pot will be less vulnerable in the wake of a stock market downturn.

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However, while a degree of de-risking may make sense, it’s important to think about your retirement income plans before you go full throttle. If you plan to exchange your pension for an annuity on your 66th birthday, the conventional approach may be the way to go. But, if you intend to invest into retirement, being too cautious may stifle your pot and mean you struggle to get the growth you’ll need to fund the next 20, 30, or even 40 years.

Working out how you’ll use your pension to generate income isn’t easy. You’ll need to think about your circumstances, goals and how long your pot will need to last. And, however you take income, you’ll want to keep your tax bills down.

This means it’s important to do your research and not rush into making hasty decisions. Pension Wise can offer free and impartial guidance on your options, alternatively, if you want personalised recommendations and are happy to pay a fee, you can consult a regulated financial planner.