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Village Features

Check your pension

Posted on May 30 2017 at 2:41:10


Austin Broad advises all employees to examine the details of their new workplace schemes.

The Government’s introduction of mandatory auto-enrolment of employees into a workplace pension scheme is now starting to reach conclusion, with millions of employees having been auto-enrolled into new schemes.

Auto-enrolment was introduced in 2012 to ensure that employers were providing and contributing to low-cost, approved pension schemes and to encourage UK workers to save more, in recognition of the lack of long-term saving that the population is currently making.

By 2019 employers will be required to pay 3% of earnings into a pension scheme, with the total contribution to the scheme set at 8%.

While you will note that employees will therefore be required to fund a payment of 5%, the effect of tax relief on their earnings will mean that this will only cost 4%.

It is great that workers will finally be saving significant sums for their future and that the employers are funding a significant slice of this saving. However, this is only the beginning of the task for employees.

Your choice can make a difference
Because employees are automatically enrolled into the scheme, the employer has to determine a fund into which the savings will be invested. This requirement is called the default fund.

As part of their obligations in setting up the scheme, they need to ensure that this default fund is as suitable as it can be, for as many of the employees as possible.

It is highly unlikely that all the workforce will share the same time horizon, needs and objectives, attitude to risk and knowledge and experience of actively investing. The result is that the fund selected may or may not be suitable.

In an ideal world, all employees would carefully consider the fund selected and take account of their individual requirements before determining whether to remain invested in the default fund or switch to one or a selection of the funds available within the scheme.

Unfortunately, the reality is that very few employees even look at the default fund and simply assume that all will be well.

There are a number of problems with inaction:

* The pension is an investment, in most cases for the long term, and therefore needs to deliver investment growth, preferably in excess of the rate of inflation, to protect its buying power when you need it. Will the default fund do this?

* You will have your own set of circumstances that determine how long the money will be invested for, before you start to draw from it or purchase an annuity.

The longer this time horizon is, the more investment in stocks and shares may be appropriate; and the shorter, the more likely it is that you would want to invest in secure assets.

* Your personal knowledge of investments and experience of investing, along with your attitude to investment risk – but just as importantly your ability to feel comfortable when investment values fall, as they will do from time to time – could be at significant odds with the behaviour of the default fund.

In reality, there are huge differences between the default funds available for the various providers of auto-enrolment solutions.

Remember, the default fund has been selected to meet your employer’s obligations and not your personal needs and objectives.

Making the most of a valuable benefit
Membership of a pension scheme should be seen as a valuable benefit.  It is a shame, therefore, when the investor’s expectations of the behaviour or future value of the scheme are different from the reality.

This can be avoided by taking some basic action:

* Take some time to arrange access to the pension scheme online, or if not available, request the information

* Ask for a copy of the fact sheet for the default fund that you are invested in; consider the funds objective and its suitability for you

* Ask your employer whether they provide any support for employees in assessing investment options; some employers pay an amount toward the cost of advice

* If you are in doubt arrange a financial review with an Independent Financial Adviser.

Gaining a better understanding of long-term investments and establishing a personal financial plan holds significant benefits and peace of mind.

While things of value are likely to have a cost, the benefits of going through the process are more than likely to outweigh the cost of the process. Most Independent Financial Advisers offer an initial discussion without cost or obligation.

If you would like to discuss any of the topics within this article, or would like to talk to one of our IFAs, please do not hesitate to contact us:
Tel: 01527 577775
Email: .(JavaScript must be enabled to view this email address)

AFH Wealth Management is a trading style of AFH Independent Financial Services Limited, which is authorised and regulated by the Financial Conduct Authority.
This article is for generic information only and should not be construed as advice. Please contact us before proceeding with any course of action.

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