When do you plan to retire?
Whilst that may seem like an obvious question stick with me for some wise pension guidance that may not be so obvious.
The date you select for your retirement can have a significant impact on the value of your pension pot.
That’s because the default investment option for many pension plans, and especially company pension plans, involves reducing the risk of underlying investments, the closer you get to that chosen retirement age.
In theory, it’s a sensible strategy.
Taking less investment risk as you near your chosen retirement age should, theoretically, protect you from some of the short-term volatility associated with stock market investments.
But what if you’ve told your pension provider one date, and then continue to work for several more years?
In this scenario, your pension investments could be growing more slowly in those final few years, due to taking a lower risk.
A new analysis by insurer Aviva has found that millions of workplace pension savers are exposed to this issue.
It’s important because of two factors; recent changes to the state pension age, and changes to employment law, which mean people can continue working for as long as they need or want.
Under the old state pension rules, women would receive their state pension income from age 60. Men would get their state pension paid from age 65.
The new rules mean that men and women under age 41 will not now get their state pension until at least age 68.
These changes to the state pension age and employment retirement age have led to many people deciding to work for longer. But if they failed to update their selected retirement age with their pension provider, default investment strategies could still apply.
The analysis from Aviva shows that the average earner in an automatic enrolment workplace pension could miss out on more than £4,000 in their pension pot if they keep their default retirement age at 65, but actually intend to retire at age 68.
For someone with a default retirement age of 60, an intention to retire at age 68 would cost them almost £10,000.
Women are more likely than men to be affected by this issue, due to the way in which default retirement ages were historically set.
Of course, the opposite of this issue is also a problem. If your pension provider holds a retirement age on file which is later than your intended retirement age, they could keep your pension pot invested in riskier assets in those later stages.
Aviva reported that 47% of workers are saving into defined contribution pensions, and around 90% of these savers are invested in default funds.
Looking at how returns could differ, Aviva shared performance figures from their ‘My Future’ default solution. The five-year return for these investments, as at 31st March 2019, was 3.2% higher 30 years from retirement, and 1.1% higher five years from retirement, compared to the return at retirement age.
It’s important to note that past performance is not a guide to the future, but these figures show a general effect of gradually moving to lower-risk investments in the approach to retirement age.
The retirement age recorded with your pension provider is simple to change; it only takes a phone call or letter.
But before changing your selected retirement age, check first whether it could result in any adverse product charges or a loss of guaranteed benefits.
Also, take some time to work with your Financial Planner to decide on a suitable retirement age, which will allow you to live the life you want once you stop working.
Jon Doyle is Founder and Financial Planner at Juniper Wealth Management. Advising clients since 2008 he has guided clients through good time, bad times and the ugly. With a clear vision on how advice should be delivered and strong opinions on how we should be investing money in order to live the life we want to live free from money worry.