In our weekly series, readers can email in with any question about retirement and pension saving to be answered by our experts. If you have a question, email us at [email protected].
Question: My stocks and shares ISA have done far better than my pension over the past 12 months. I usually just use tracker funds for my ISA, and although it’s taken a dip after Trump’s tariffs, this still wasn’t as dramatic as the hit my pension took. I’m thinking I’d rather just manage my pension cash myself – can I get my work to pay straight into an account I manage, rather than my workplace fund?
Answer: It’s been a rocky road over the last few weeks for investors. The US President’s actions haven’t exactly been calming for global stock markets, and it’s understandable that this instability can be deeply unsettling if you are logging into your accounts to see a big fall in the value of your funds.
The secret is to keep calm. Investing is a long-term game, especially when you are saving for retirement. But that doesn’t mean deliberately not taking a good look at your current investments and deciding if the current strategy is still the right one for you.
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Most workers are automatically enrolled into a pension scheme when they join a new employer. They can opt out if they want to, but if they stay put – and the vast majority do – then they have to pay a minimum contribution of 4 per cent of their salary, their employer pays 3 per cent and the government adds on another 1 per cent through tax relief.
When you are automatically enrolled into a pension scheme your contributions are invested in the default fund. You can instead choose your own investments if you want, but over 90 per cent of workers don’t, instead keeping this investment selection.
The trustees of the workplace pension scheme are responsible for selecting or approving the default fund, and the provider usually designs and manages the fund.
The default fund aims to meet the needs of all the pension scheme members, which could run to thousands and thousands of workers. As it has be all things to all people, it often has a medium or low-risk profile to avoid sudden plummets in fund values which may unnerve some pension savers. But that also means it won’t necessarily produce spectacular returns either.
If the default fund doesn’t match your investment strategy, then you can change. Have a look at the other investment choices on offer within the pension scheme, and you may find something that matches your needs more closely.
Alternatively, you can look wider than the workplace pension. Sometimes, an employer will agree to pay pension contributions into a pension account of your choosing, and it’s always worth asking if they will do this. You would have to opt out of automatic enrolment. But often this is just more administration for the employer, and they may be reluctant.
You can always pay additional contributions into your own pension, say a SIPP. Before you do, I would urge you to explore if you have first maxed out your workplace contributions.
Often, employers will offer to pay more than the minimum if employees also pay more, and it’s worth taking them up on that offer. After all, it’s free money, and if you don’t do this, you probably won’t receive the money in any other way.
If you decide to pay additional contributions into a SIPP you may also want to consider transferring any other pension accounts you have into the SIPP as well. That way your pension funds will be in the same place and will be easier to manage.
However, a word or two of warning before you do this. Don’t transfer any pension that your employer is still paying into, otherwise you will lose those valuable employer contributions – unless the scheme allows you to partially transfer while still remaining a member.
You also want to make sure you don’t lose any valuable guarantees if you transfer, such as a guaranteed price if you buy an annuity. Exit penalties are also worth looking out for. And if your workplace pension scheme is a defined benefit scheme, then it may be that you’re not allowed to, or it’s not in your best interests to, transfer.
It sometimes takes the shock of market volatility for people to question whether their investments are in the right place. It’s always good to address that question, but remember that making snap decisions is more likely to lead to outcomes that aren’t right for you. So, take your time and consider your options.
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