Pension inertia: it's an occupational hazard

Don't switch off if you're in a company scheme, says Sam Dunn
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The Independent Online

It's your first week in your new job and you happily sign up for the company pension. This may well take the form of a "defined contribution" (DC) scheme, where the employer at least matches any payments you make into the fund to build up a pot of cash to buy an annuity. This is the guaranteed income for life which you must purchase with three-quarters of your pension by the age of 75.

It's your first week in your new job and you happily sign up for the company pension. This may well take the form of a "defined contribution" (DC) scheme, where the employer at least matches any payments you make into the fund to build up a pot of cash to buy an annuity. This is the guaranteed income for life which you must purchase with three-quarters of your pension by the age of 75.

So far, so good. But once you've signed up, you can't afford to forget all about your pension and assume your financial future will take care of itself. For a start, are you really putting enough money aside for your retirement? Research from accountants Hewitt Bacon & Woodrow (HBW) shows that the average contribution paid into DC occupational schemes is 10 per cent of salary - well short of what's needed for a comfortable retirement. Just 3 per cent of companies, the research adds, reckon their staff have a decent understanding of how much they need to set aside.

If you're planning ahead, it can help to know where your money is invested so you can gauge the level of risk. Different schemes take vastly different approaches. For example, a slice of the BT staff pension fund is soon to be invested in hedge funds, while Norfolk county council employees' money is in private equity. But according to the National Association of Pension Funds (NAPF), the vast majority of employees simply accept where their occupational pension is invested.

The NAPF says 39 per cent of the average pension fund is in equities,25 per cent in overseas shares, 13 per cent in UK bonds and 25 per cent in other investments.

It is also worth getting into the habit of checking the projected retirement income on your annual pension statement, says John Turton of independent financial adviser Bestinvest.

Unless your employer goes bust, you don't need to worry about a final salary scheme: performance is not an issue for you since payouts depend on your contributions, how long you've been with the company and your salary when you retire.

If you are in a final salary scheme with a large, profitable company, you should be fine. But be careful if the scheme is with a smaller company suffering losses and in deficit, in case bankruptcy is an issue. "This could be worth seriously examining. A specialist adviser can help," says Mr Turton.

Some DC schemes let you choose from between three and 20 funds to fit your preferred level of risk. If this is the case with your pension, ensure the risk profile suits you and check the fund's annual projection.

Watch out for DC schemes that offer just one fund as you won't have any say where your money goes. It could be wholly invested in cash, for example, which means your pot will grow at a slower rate.

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