Thanks to auto-enrollment, workers across the country now have a defined contribution pension set up and managed by their employer.
Although it means that your pay packet will be a little lighter at the end of each month, it amounts to a pay rise in the long run as your employer will make a contribution to the pot every month that you do. From April this year, you will be expected to put 5% of your pay into the fund each month, while your employer will pay an additional 3%.
‘Auto-enrollment’ means that you will be signed up automatically – you won’t be asked beforehand. However, you do have the option to opt-out if you wish to. Most financial experts agree that, in general, people will be better off staying in the scheme.
That’s not the only option you have when it comes to your new pension pot, though. Although you won’t have been involved in setting the fund up, there’s plenty that you can do to take control once it’s in your hands.
Sign up for an online account
Most pension providers offer some kind of online account or portal. Usually these will show you your balance, let you carry out certain admin actions, and give you the ability to update your personal details. When you’re registered for your company pension scheme – generally this happens after you pass your probation period – you’ll get something through the post explaining how the scheme works and also giving you the option to register online.
Track your pensions, and consider combining them
If you’ve been job hopping, then you may have several different pension funds set up by different companies. It’s a good idea to keep a record of these so that you don’t lose track of what you have once you get closer to retirement. A simple spreadsheet will do.
Alternatively, you should be able to transfer the money from the old pension pots into your new fund. This can make it easier to manage long-term, although it’s worth weighing up the pros and cons of each scheme before making that decision. In some cases you will be able to complete the transfer online, however some providers will require you to fill out a physical form.
Change your investment profile
The final important thing that you have control over is how your money is invested. Defined contribution pension plans will usually offer a range of different funds which allow you to invest your money in different ways. Some funds specialise in a specific type of asset – for instance shares in a certain industry. Others are designed to provide a mix of assets. This is known as ‘diversifying’, and is the most popular choice because it reduces the risk associated with the investment.
Typically shares perform better in the long term, but bonds and cash are lower risk. To help you reap the benefits of both, many providers offer ‘Lifestyle Funds’. These allow you to invest your pension in riskier assets when you are younger, before shifting to a more risk-adverse approach when you are closer to pension age.
You shouldn’t be afraid of making decisions about your pension investment, but you do need to understand the choices that you’re making. For further information, this article from the Money Advice Service describes the golden rules of investing sensibly and explains your options in more depth.