To ensure long-term financial security, it is pivotal that people construct their pension strategy as part of their financial planning, according to digital wealth manager Moneyfarm.
Carina Chambers, pensions technical expert at Moneyfarm, said: “While planning for retirement can feel daunting, taking control of your pension strategy early can transform uncertainty into long-term financial security.
“The key is to understand what you have, ensure your investments are appropriately allocated and make consistent contributions above the minimum where possible.”
She said regular reviews are “essential” as a pension strategy should evolve with an individual’s circumstances. As such, Moneyfarm has drawn up a five-step process for building an effective pension strategy.
Step one: Weighing the existing pot
The first step any full-time employee in the UK should take is to track down and figure out how much they have saved so far via workplace pension schemes.
In the UK, any employee over the age of 22 earning more than £10,000 a year is legally entitled to a workplace pension scheme. With an 8% minimum of qualifying earnings contributed per month, the typical split for employees is 5% paid by them and 3% by their employer.
However, many people do not keep track of or consolidate the various pension pots they build throughout their careers. The Pensions Policy Institute estimated that more than £31bn of pension savings is currently lost in the UK, as many people forget to transfer their pension pots over when they change jobs.
Moneyfarm urged British workers to document the location (and amount) of each pension, including policy numbers and the names of providers.
Step two: Getting to grips with how the pot is invested
Next, it is important to understand how that pension money is being invested, Moneyfarm said.
Most, if not all, workplace pension schemes offer a default one-size-fits-all investment approach, meaning it is not necessarily best tailored to the individual’s circumstances and goals, potentially leading to underperformance or unsuitable investments.
As such, it is important to review the pension provider’s fund choices and adjust them to better match your specific objectives, Moneyfarm noted.
For example, if an individual has more than a decade until they retire, they can afford to take more risk by upping their allocation to equities.
Step three: Compounding contributions
“Most people already have some provisions in place through workplace pensions but minimum contributions alone may not be sufficient for maintaining your lifestyle in retirement,” warned Chambers.
As such, the next step is to assess exactly how much is being contributed a month and whether it is possible to scale this.
Increasing your contributions, even by a small amount, can “significantly boost savings thanks to compounding, the snowball effect of earning returns on past returns”, Moneyfarm said.
As an example, if an individual earning £30,000 increased their personal contribution from 5% to 7% (or £50), over 20 years (assuming 5% annual growth) they would add an extra £20,832 to their pot.
It is also worth checking whether the employer offers any additional benefits, such as matching contributions above the minimum.
Step four: Future forecast
Once these assessments have been made, it is important to then work out whether the plan in place will actually provide the desired retirement, in terms of timing and expected income.
If not, there are possible measures that can be taken, such as increasing contributions, delaying retirement, adjusting lifestyle expectations or taking on more investment risk if it is appropriate to do so.
Step five: Regular review
Life plans and circumstances often change, meaning individuals need to adopt a flexible mindset to their long-term financial planning.
Moneyfarm recommended that pensions should be reviewed at least once a year to check investment performance and contribution levels in line with their evolving life context – for example, marriage, children, job changes or windfalls.
“By following these fundamental steps and then staying engaged with your pension planning, you can work towards building a more secure financial future,” said Chambers.