I make no apologies for returning to the subject of pensions this week. My column last week provoked different reactions from readers, which need addressing. My simple hope was to encourage more people to find out about their pension options so that they can make a reasonably educated decision for themselves; whether that means deciding how much to contribute to their pension pot, or choosing where the cash is invested.
I made the analogy that if people took as much time planning their pension as they did shopping around for gas, electricity or phone deals, they would be much better off. One reader took me to task over that describing it as a "false analogy" adding that "to suggest a parallel with pensions is ludicrous". He rightly pointed out that shopping around for energy deals means comparing what is, essentially, identical products, which means people can make a rational decision based on the information they've gleaned. You clearly can't deal with pensions in the same way.
Comparing the past performance of investments, for instance, does not give any guarantees about future returns. Therefore, wrote my correspondent, finding out how your pension fund is performing won't give you any help in deciding what to do in the future. I disagree with this.
Taking any investment decision involves some guesswork and hope, of course, but the decision should be based on some information. So, for instance, if you believe that the Japanese economy is likely to boom in the next decade, deciding to invest your retirement cash in funds invested in the region might seem a good idea. However, if there's a change and the economy lurches back into trouble, you may revise your decision and move your savings into what seem like safer waters.
That is why, in my view, checking your pension regularly is a must, and will prove to be financially fruitful. It will mean you will be making investment decisions based on the latest available data, rather than relying on out-of-date information, which could prove very costly. Indeed, another correspondent emailed to berate me for not going far enough. "People should be far more hands on. Not only once a year – once a week is more like it," he advised.
I'm not sure that you need to be that diligent, but I am sure that regular pensions reviews will pay. If only because knowing how well your pension is performing will help you decide whether you need to make further contributions to your pot.
Pension planning is all about making assumptions and you should start with working out how much you will need to survive on when your retire. From that, you should be able to work out how much you need to save now. But that means making assumptions about returns, which is likely to change as the years pass. If returns prove less positive than you hoped, it's better to find that out when you can still do something about it.
It is worth remembering that a pension is simply a savings scheme with the single aim of providing you with enough cash for your retirement. Putting some effort into helping it achieve its aim should prove wise.Reuse content