7 little-known factors that could affect your pension
Hopefully you have, or plan on soon starting, a pension. Without one, you may be fully reliant on the State Pension and other benefits to see you through your retirement. To maximise your pension you need to be aware of various factors; although it’s largely true that the more you put in the more you will get out, there are multiple influences that can positively or negatively affect your fund or pension income:
The growth rate is perhaps the single biggest factor to determine the eventual size of a fund. It’s therefore vitally important to have an active interest in your fund, to check its performance and see if it may be better off elsewhere. Unless you’re a financial professional, it’s not advisable to try and manage the fund yourself, so it’s worth having a pension review to check the performance and consider the best options for maximising the fund.
In certain situations, you can have a better return by consolidating multiple funds into one. One way this can work is if you are paying more in fees than the funds are growing, so rolling them into one will mean you are only paying one fee and there will be more capital for returns to apply to. However, consolidation isn’t right for everyone and should not be a sole driver for moving your pension without careful consideration – independent advice needs to be sought before you do it, as it can have risks of its own.
If you have a pension then you are probably paying an annual fee. There’s no avoiding this, but it does vary between funds. The key thing to remember is that the fund must grow by more than the fee for you to actually see a return – low-performing funds can lose money if the fee is continually higher than the growth rate. You shouldn’t be scared of higher fees though, as it could be that the best performers charge the most. A pension review will keep you informed of how well your fund is doing, including whether you could see better results by having lower fees.
Size of the fund
The amount of money in your fund has an impact on how much it can grow, so a smaller fund will grow much slower than a larger one. When thinking about what to add to your pension, remember that tax relief is applied to all contributions. The fund will also benefit from compound interest, which is where interest is applied on interest and can have a powerful impact on your fund size. With that in mind, it’s important to add as much as you can to the fund to give yourself the best chance of it being big enough to provide a comfortable retirement.
The main impact of age on your pension is it determines how long the fund needs to provide an income for. If you decide to stop working at 50, you may need to live off that money for another five decades, whereas if you keep working into your 80s you won’t need to make the money last as long and can afford to remove larger chunks. Age also has an effect on the State Pension: the current rules are anyone who reaches the State Pension age before 6 April 2016 will see it increase by 10% each year it is deferred. For this financial year the basic State Pension is £5,881.20, and you will receive a further £611 if you defer for one year.
If you are considering purchasing an annuity when you retire, it’s worth knowing that you can secure extra income if you qualify for an enhanced annuity. There are a range of possible qualifying factors, including illnesses like cancer and diabetes, and lifestyle choices like smoking, as our infographic shows. An enhanced annuity can provide much more income than a standard annuity – there’s a difference of 64.7% between the bottom standard annuity and the top enhanced annuity income for a £50,000 fund crystallised at the age of 65.
As with car insurance, annuity providers may look at mortality rates in your postcode when calculating the income you will receive. There isn’t anything you can do about this, although if you are considering moving in the near future you could get some quotes to see if purchasing an annuity could leave you worse off than delaying until after you have settled into the new home. As a pension is meant to provide a source of income during retirement, you will want to get the best performance possible. To achieve that, it’s important to keep an eye on how well the pension is doing. One of the best things you can do is have a pension review, which check the performance of your fund including fees and growth, and whether it could be improved elsewhere. We recommend a pension review every year, so your fund is optimised and you always know how well it is performing.