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 just started at a new workplace with a new pension provider. I’m in my thirties, and with my old provider, I was just in their “high-risk” option, to get the best returns. I didn’t really know where the money was invested but had seen taking a high-risk approach was a good idea broadly when young. With the new provider, they don’t have options laid out as simply as this, and just have an array of funds. I don’t know how I’m meant to know how each will perform. Is there any guidance the provider is obliged to offer me? And how should I go about picking? I’m worried if I stay with my default I’m going to be getting bad returns.
Answer: It’s positive that you are taking such a keen interest in your retirement pot at a relatively young age. Before getting into some of the things you need to consider when choosing your investments, let’s cover off the key elements of workplace pension saving.
Under automatic enrolment, employers are required to offer a pension scheme that meets minimum standards and enrol eligible workers into that scheme (unless they opt out). The minimum total contribution is 8 per cent of “qualifying earnings”, with at least 3 per cent coming from the employer, then the employee pays the difference – so usually 4 per cent directly and 1 per cent via upfront pension tax relief. In 2024/25, qualifying earnings – the chunk of earnings against which minimum contribution percentages are calculated – are earnings between £6,240 and £50,270. This means, for example, someone earning £26,240 a year would have their 8 per cent contribution based on the £20,000 of earnings over £6,240 (the lower qualifying earnings band). Lots of employers will offer more generous matched contributions than this, however.
Under auto-enrolment, it is your employer who chooses the pension scheme, rather than you. Some companies might offer an alternative to your main auto-enrolment scheme, such as a SIPP (self-invested personal pension), but they are under no obligation to do this.
If you do nothing, your pension contributions will be invested in an auto-enrolment default fund within the pension scheme chosen by your employer. This is simply an investment fund that is designed to be broadly appropriate for all members of the pension scheme. As such, it will not be tailored to your personal circumstances or risk appetite.
This default fund is subject to a charge cap of 0.75 per cent. This charge cap was introduced to ensure savers who have little power over the scheme into which auto-enrolment contributions are paid, are protected from high charges. Even relatively small differences in percentage charges can have a big impact on your retirement, particularly over the course of decades.
Some auto-enrolment pension providers, including yours, will offer alternatives to this default but again they are under no obligation. Often, schemes will just offer a small selection of their own in-house investments.
Should I consider an alternative to the default?
While how much you pay into your pension (and how early you start) is arguably the key factor in determining your eventual retirement outcome, investments can provide a significant boost too – particularly over the longer term. As you’re in your thirties, your investment time horizon is likely to be at least 30 years, which is long term in anyone’s book.
While the attitude to risk differs from person to person, generally younger investors can tolerate greater fluctuations in the value of their pot over the short term as they don’t need to access the money for decades. Historically, those who have been willing to accept volatility over the short-term have generally been rewarded via returns over the long term.
It’s really important you diversify your investments too, so all your retirement eggs aren’t in one basket. You can choose to do this yourself by picking a balanced mix of funds, stocks and bonds, but if this sounds like too much work lots of pension firms, including some workplace providers, offer ready-made diversified funds aimed at different risk appetites. When choosing where to put your investments, keeping your costs and charges as low as possible is critical, as high charges can knock tens of thousands of pounds off your retirement pot over the course of your savings journey.
Unfortunately none of us have a crystal ball, so it’s impossible to say with any certainty which funds will perform well over the long term and which will perform poorly. The key is to get in the savings habit early, contribute as much as you can afford regularly, choose diversified investments with levels of risk you are comfortable with, and keep your costs as low as possible.
In terms of guidance, lots of providers will offer help and information covering things like contributing to a pension, tax rules and investing principles. Your provider will also provide information on your investments and the charges you pay. In addition, you can go to the Government’s free MoneyHelper website for more information. If you want advice based on your personal circumstances, you’ll need to speak to a regulated financial adviser.
