8 Questions To Ask About Pensions
If you're considering starting a pension or joining a new one, you need to ask the key questions. Well, here they are.
If you're considering starting a pension or joining a new one, you need to ask the key questions. Depending on the type of pension scheme, there are either two or six questions.
I'll start with the old-school final-salary (or defined-benefit) pensions. This is where your company pays you a percentage of your final salary when you retire, based on how long you worked for them. There are two key questions.
1. How big is the deficit?
The key question here is, if the company has a pension deficit, how big is it? A deficit doesn't mean you'll get paid a smaller pension than you were promised, because the company has to make up the deficit for you. However, if the deficit is unmanageably high it means that it might force the company to go bust. If you're concerned about its size, you could post a message on Pensions - Practical Problems to discuss it.
2. Am I at risk of losing some of my pension?
A follow-up question to that is, if the company can't handle the deficit, are you at risk of losing some of your pension? So find out what will happen if your scheme is taken over by the Pension Protection Fund (PPF). If you're retiring at 65, for example, the PPF will pay out no more than about £30,000 per year, so if you're expecting a lot more you'll lose the difference.
There's not much you can do about this, but it does mean you can prepare yourself mentally for the worst or find other additional ways to save for retirement.
Money-purchase (or defined-contribution) pensions are where you contribute money to a pension pot, which is invested. It might be that you have one of these pensions through your employer, and that they contribute money to your fund too. Personal and stakeholder pensions are also types of money-purchase pension.
Here are your six questions:
1. What choice of funds do I have?
As far as I know, all pension schemes offer at least a couple of choice of funds to invest in, e.g. you might be able to invest in the Far East, or small UK companies, or a good old index tracker. You'll want to look at all the options and understand what the risks and potential rewards are.
2. What are the charges?
Next, you'll want to know how much the scheme will cost you. It may be that some funds are more expensive than others, and you need to factor this in.
Charges aren't the whole picture of course. How large the investment grows is also very important. However, the charges can make a huge difference.
According to the Financial Services Authority last year, a 30-year-old man retiring at 65 and saving £200 a month into a pension over 35 years could pay charges perhaps from £57,800 and up to £164,000! That's a huge difference, which could make a big dent in your pot. Remember that paying just one percent more in charges each year could cost you tens of thousands of pounds. So could half a point, for that matter.
3. Are there charges for switching funds?
Your attitude to risk may change as you get older. In fact, it is wise not to leave your pension in riskier investments as you approach your retirement. So check if there are charges for switching your investment between funds.
4. Are there charges for changing my retirement date?
Similarly, it's possible you'll be charged for changing your retirement date. This charge should be relatively small and probably won't change your decision to take part in the scheme, but it makes sense to be aware of it.
5. Do I really need pension protection insurance?
This question is a personal one. You may be offered insurance cover that will keep paying your pension for you each month if you are sick or made redundant.
However, I suspect this insurance is a nice little earner for the pension companies, as it's a relative of payment protection insurance (PPI). When PPI is cross sold along with another product (in this case, the pension itself), it's usually hugely over-priced.
Sadly, I don't have figures at present, so I can't say definitively whether this 'pensions PPI' is a rip-off, but I'd be darn wary about it. Weigh up the risks versus the cost. Also, consider alternatives, such as setting up an emergency savings pot or getting income protection insurance.
For those of you who think it won't matter if you miss a year's contributions, read Miss A Year's Pension Contributions And Lose £64,000!
6. Do you shop around for an annuity?
When you retire, you swap your pension pot for a monthly (or perhaps annual) income till you die, and this is called an annuity. If the Trustees will get the annuity for you, ask them if they shop around? It could cost you thousands of pounds per year if they don't. Read about it in Boost Your Income By Up To 30%!
> Ask a question on our Pensions - Practical Problems discussion board.
> For an alternative way to save for retirement, consider an ISA.
> Read more in Pensions vs ISAs and Get The Most From Your Pension