Pension Clinic: The importance of a pension MOT

Leave your pension planning too late, and you risk damaging your retirement prospects. Here's what to do. 

One of the great advantages of automatically enrolling people into a workplace pension is that they haven’t really had to think about pensions to get there: unless they actively opt out, they start building up a pension pot. But the dilemma is how you turn a passive saver in their 30s and 40s into an engaged and informed saver in the run-up to retirement, able to tailor their retirement plans to meet their particular circumstances and needs.

In the past, when people generally either retired with a salary-related pension paid automatically at a set date, or could be expected to turn their pension pot into an annuity, the choices available were pretty limited. But with the advent of pension freedoms and the move away from salary-related pension provision, individual savers now have a lot more choices to make, including decisions about when and how to stop working. This requires a much higher level of engagement and support than currently exists. So when should people start thinking actively about their retirement finances?

Don’t leave it too late

Waiting until you receive a ‘wake-up’ pack from your pension provider, typically three months before you retire, is leaving it too late. A much better idea is to engage with your pension planning at a considerably earlier date.

The Government’s Pension Wise service is available to anyone aged 50 or over who has a workplace pension in the form of a pot of money (known as a Defined Contribution pension). They can visit the website, have a phone consultation or arrange to see someone face-to-face. Although Pension Wise won’t give regulated financial advice, it will talk people through some of the different options they have with regard to their pension savings.

Another initiative which the government is promoting is the idea of a mid-life ‘financial MOT’. The suggestion is that at a particular age (such as 50) we would all review our finances and make changes if we were not on course. The feeling is that turning 50 is one of those points in life when people are likely to be willing to think more about pensions and retirement. On the other hand, it is not so far through working life that they don’t have time to make changes which could make a significant difference to their quality of life in retirement.

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Linked to the idea of a financial MOT is the mid-life career review. The job you do and the length of time you can go on doing it can have a big impact on your retirement plans. Some years ago the government piloted these conversations which are, in effect, careers conversations for older people.

The idea is that rather than simply hope that you will be able to go on doing your current job until you are ready to stop, you review whether perhaps with some retraining you might be able to change to a second or third career that would see you through to retirement – especially if you have a tough job. Rather than burn out and end up on sickness benefits, the idea is to plan ahead and move into something that you can keep doing for longer, thereby building up a bigger pension and enjoying a better quality of life.

Matching your plans

Another good reason for reviewing your finances sooner is that the way your money is being invested needs to match your retirement plans. In the past, many pensions providers used to gradually switch pension savers’ money into lower risk, lower-return options as they got older. This process, known as ‘lifestyling’, was based on the assumption that they would then go on to buy annuities and therefore would want their pension pots to be increasingly predictable as they approached retirement. But most people now don’t buy an annuity at retirement, so it is therefore well worth checking that your pension money is not still being invested on the basis that you are heading for an annuity.

It is, of course, ideal to keep your retirement finances and retirement plans under regular review with the benefit of expert advice, and to do so throughout your working life. But for most people with busy lives and other things to think about, the idea of a big review on a significant birthday such as their fiftieth could be a really positive initiative that will help them get their finances on track.

Steve Webb is director of policy at Royal London.

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