Tuesday 24 April 2018

Make sure your pension is the right fit

john Tuohy
john Tuohy

John Tuohy

About one in three of us with a private pension are paying into a defined contribution scheme.

Unless you pay attention to how your scheme is managed, you could end up with a lot less than you bargained for.

All defined contribution schemes have a default fund - and this is where your money is placed if you don't make any investment decisions around it.

Most default funds are of the 'one-size-fits-all' variety. The consequence? You might find you end up with far less than you expected when you retire.

When you're a member of a defined contribution scheme, your savings and your employer's contributions are invested in assets such as shares, bonds and property. At retirement, your accumulated savings can be used to provide you with a tax-free cash lump sum, to buy a pension - or you can choose to keep some of it invested. The value of your savings at retirement depends on the amount saved each year, but also to a large degree on the investment return achieved.

Obviously enough, that means some smart thinking is needed around investment. While schemes do offer investment choice, most people go for the default option and leave the real decision-making to the trustees, who are responsible for managing the default fund.

Ideally, trustees need to match the way the default option works to your needs - and those needs change over time. When you're young, you'll probably want to see more of your funds invested in riskier assets like equities. However, when you are coming close to retirement, you will be more concerned about protecting what you have, so safer assets like cash will have a bigger role to play.

The default fund in your defined contribution scheme should be flexible enough to adapt as you get closer to retirement, so that you can put your savings in the right place, depending on what you plan to do with the fund on your retirement.

However, the Pensions Authority recently said it was concerned that the default funds chosen by trustees have not been tailored enough to best deliver that sort of smart investment thinking. Instead, trustees have had to rely on 'one-size-fits-all' products offered by the industry. These pre-built funds are often driven by what product providers think they can sell rather than being designed around your best interests. They don't necessarily take into account the different age and risk appetites of those paying into a pension.

Far too often, trustees and companies entrust a single provider with operating their plan, and put too much confidence in their capacity to keep members' interests at heart.

Default funds should be tailored to take into account the age of their members, along with their earnings potential, risk preferences and end goals. They must also be flexible enough to accommodate the different and changing needs of participants.

The Pensions Authority is taking steps to ensure that the way defined contribution schemes are run is improved. In the interim, find out from your pension trustees how your savings are being invested. Ask if the asset mix of the default fund is truly appropriate for you - and the majority of the scheme members.

John Tuohy is chief executive at the investment advisers Acuvest

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