How to build a better pension

Many pension funds fell in value by as much as a third during the financial crisis, costing investors who retired last year thousands of pounds in annual pension income.

But while funds may still be in the red, the good news for investors yet to draw their pensions is that they have recouped much of their losses, thanks to the market rebound. “Quite a lot of the rebuilding has been done for you,” says Laith Khalaf, pensions analyst at Hargreaves Lansdown, the financial adviser . Even so, say experts, the recent market woes should serve as a wake-up call. Here are some tips for getting more from your retirement saving.

1 Take stock

Many investors do not know the current worth of their pensions, let alone what they might get when they retire, say experts – so obtaining fund values and pension projections should be the starting point.

Investors commonly have half a dozen different plans, which is “too many to keep track of”, says Malcolm Cuthbert, partner at Killik & Co, the advisory firm.

Online calculators can forecast fund growth and how much you should be saving to achieve a certain level of retirement income.

2 Claim tax relief

The big benefit of saving through a pension plan is that higher-rate taxpayers can receive 40 per cent tax relief on their contributions. But this year’s Budget capped higher-rate relief for individuals earning more than £150,000 and experts fear that other high earners could lose out in future. So investors should not delay taking advantage of the tax perk while it is still around, say advisers.

3 Use your employer

With many employers topping up contributions to workplace schemes, these arrangements should be the first port of call for many investors. Cuthbert says workplace additional voluntary contribution (AVC) plans are often also the cheapest choice for extra saving but they may only provide a limited choice of funds.

4 Know your risk appetite

Many investors were too exposed to equities going into the credit crisis, says Adrian Shandley of Premier Wealth Management, with the result that they went into a “blind panic” when markets fell.

Investors should adopt
an asset split that matches their attitude to risk
and pension goals, says Hugo Shaw at advisers Bestinvest.

The further away that investors are from retirement, the more risk they should be prepared to take in the quest for higher returns – they can afford to wait if markets go against them. Equities are the obvious choice for growth potential, and many advisers think younger investors particularly are underexposed to emerging markets. Regular saving offsets the risk of bad market timing.

5 Monitor fund quality

Most pension investors hold funds rather than individual shares or other assets, but advisers say that rather than a simple “buy and hold” strategy, the performance of managers and funds needs to be regularly reviewed.

6 Find the best wrapper

Not everyone needs or uses the flexibilities of a self-invested personal pension (Sipp), and stakeholder-style personal pensions can sometimes offer sufficient investment choice at lower cost. Individual savings accounts (Isas), in which over-50s can invest £10,200 a year, are also attractive for retirement funds, say advisers.

7 Derisk near retirement

The strategy to employ in the run-up to retirement is “probably the most difficult part of the pension investment puzzle”, says Khalaf of Hargreaves Lansdown. “The trick is to avoid a large fall in the value of your portfolio just before you draw on it while maintaining some decent growth over those last few years,” he explains.

The traditional solution is to shift out of equities and into bonds and cash as retirement approaches.

Investors can monitor their own portfolios, or use an investment adviser, and gradually shift the asset mix themselves. This may be preferable to using the “lifestyling” option offered by some pension schemes, which shift from equities to bonds automatically and could mean investors derisking at the wrong moment – during this year’s recovery, for example.