A reader wants to know what to consider when deciding what to do with their pension
In our weekly series, readers can email in with any question about retirement and pension savings to be answered by our expert, Tom Selby, director of public policy at investment platform AJ Bell. There is nothing he does not know about pensions. If you have a question for him, email us at money@inews.co.uk.
Question: I’m going to be 50 next year, and so far, I have saved about £18,000 in a workplace pension. I have been automatically enrolled since 2016.
My question is should I stick with it and get a SIPP as well? Or should I just put more in the workplace one until retirement? What do I need to consider when choosing a pension?
I hadn’t really thought about my pension until now.
Answer: Generally, for those who are contributing to a workplace pension scheme, staying in that scheme is likely to be a financial no-brainer. You will get the extra bonus of your employer’s pension contributions, as well as upfront tax relief and tax-free investment growth.
Beyond this, you should write down a monthly budget and think about whether pension saving is your priority for any spare cash you have. Most people want to get an emergency pot sorted first to cover off any unexpected expenses, then think longer-term towards things like pensions and investment ISAs.
If pension saving is the priority and you are in your workplace scheme, the next decision is whether to top up contributions to your existing pension or contribute to another pension, such as a SIPP. Most workplace pension savers should be able to easily top up their pension account if this is the option you choose.
Whether you opt for your workplace pension or a SIPP, there are a number of things you should think about before making this decision. Costs and charges are always important, as these are one of the variables you can have absolute control over and can have a big impact on the final value of your retirement pot.
Simplicity of administration is also important for lots of people, particularly when they start thinking about turning their pension into a retirement income – having multiple pensions with multiple providers can create extra hassle.
On the other hand, workplace pensions often have relatively limited investment choice and may not offer the same level of flexibility you can get in a SIPP.
Customer service and trust will also likely be major considerations, although the latter is clearly hard to measure.
When pension savers get to age 50, they get a document from their pension provider that gives a summary of their pension – a ‘wake-up pack’.
This is designed to prompt you to think about how you want to access your retirement pot when the time comes. (Note that the minimum age someone can receive access their pension is age 55 – rising to age 57 from 2028.)
This could include how to generate an income and the retirement lifestyle they want. This all feeds into how much someone could contribute in the run-up to retirement and how much investment risk they might take.
These can be difficult decisions but there is help at hand. The Pensions and Lifetime Savings Association have published a set of “retirement living standards”, which can help people picture what kind of lifestyle they could have in retirement, and how much money they may need to get this.
It’s important to remember that these are only a guide, however, and the size of pot you need to fund your retirement spending will vary from person-to-person.
It also doesn’t take into account housing costs which many still have in retirement.
As you started retirement saving relatively late, it is important not to be put off by these numbers – any contribution you can afford to make to your pension will help boost your quality of life in retirement, as well as benefitting from generous pension tax relief and tax-free growth.
The Government also offer a free, impartial guidance service – Moneyhelper. The guides can be very helpful in figuring out the basics of retirement saving and the things you need to consider when taking an income.