In our weekly series, readers can email in with any question about retirement and pension saving to be answered by our expert, Tom Selby, director of public policy at investment platform AJ Bell. There is nothing he doesn’t know about pensions. If you have a question for him, email us at money@inews.co.uk.
Question: I’ve been paying into my workplace pension for the five years I’ve worked there. I’ve been quite passive and never checked it, but after looking last week, it’s performing terribly, and on top of that the provider is taking heavy fees too. Can I pull my money out and put it elsewhere, and also get my workplace to pay into this new fund as well? And how would I decide where to put it?
Answer: Let’s start with the issue of “hefty fees”. As you’ve been paying into your workplace pension for five years and haven’t checked it, it should be an automatic enrolment qualifying scheme and your money will almost certainly be in the “default fund”. This is just the fund your pension contributions are invested in if you do nothing and means, among other things, that your charges should be capped at 0.75 per cent.
If you had set up a pension prior to auto-enrolment, which was introduced gradually between 2012 and 2018, then you might have been charged more than this. Anyone who has one of these older pensions with high charges should review their policy and consider whether they could get a better deal from a more modern provider.
Before transferring any pension, you should check the terms of your existing policy to ensure there aren’t sky-high exit fees that would be applied or valuable guarantees that would be lost. You can do this by asking the provider that administers the scheme. Alternatively, pension finding tools, including a free one created by AJ Bell, can gather this information for you.
Having said all that, you can build your own balanced, diversified pension investments for less than 0.75 per cent. What’s more, some workplace schemes offer little by way of investment choice or retirement income options.
While it is possible for an employer to divert your auto-enrolment pension contributions to an alternative scheme, they are under no obligation to do so. All firms are required to offer is a qualifying auto-enrolment scheme with a default fund charging 0.75 per cent or less.
If your firm doesn’t already offer an alternative pension scheme, then you will likely be stuck with the scheme you have. It’s worth checking, if you haven’t already, that there aren’t different investments available through your provider outside the default fund that might be more suitable to your risk appetite and long-term goals.
It’s also important to remember that pension investing is a long-term game, and in the context of a savings journey that will last multiple decades, five years isn’t a huge period of time. The key is to invest in a way that suits your risk appetite and long-term goals.
It may, however, be possible to transfer your existing workplace pension pot to another scheme. If you do this, it’s important to remember you will be moving your retirement pot from an environment where charges are limited to 0.75 per cent to a world where they could exceed this level.
Saving in a SIPP will provide you with the freedom to pick and choose an investment portfolio that suits your preferences and risk appetite, but keeping costs as low as possible should remain a priority.
This is probably easiest to illustrate with an example. Take two people who save £3,000 each per year, inclusive of tax relief, in a SIPP. Both enjoy identical 5 per cent annual returns but one pays 1 per cent in charges while the other pays 1.5 per cent.
After 30 years, the person who paid 1.5 per cent in charges would have a pension pot worth £160,000, while the person who paid 1 per cent would have a fund worth £175,000. Or to put it another way – paying just 0.5 percentage points more in charges has cost them £15,000 in retirement.
If you go down this road, you should also make sure you are comfortable managing two pension pots at the same time, because auto-enrolment rules do not allow your employer to pay your workplace contributions directly into a non-qualifying scheme such as a SIPP. One thing you absolutely shouldn’t do is opt out of your auto-enrolment scheme to pay into a different scheme, as you will miss out on employer contributions.
In terms of choosing your investments in a personal pension, you can either pick your own stocks directly or pay a fund manager to do it for you. Lots of firms also offer “ready-made” funds targeted at different risk levels.
Whichever option you go for, ensuring you get value-for-money and diversify your investments – so all your eggs aren’t in one basket – is crucial.
