In our weekly series, readers can email in with any question about retirement and pension saving to be answered by our expert, Tom Selby, head of retirement policy at investment platform AJ Bell. There is nothing he doesn’t know about pensions. If you have a question for him, email us at money@inews.co.uk.
Today’s question is: I have been investing in my ‘Nest’ pension for approximately seven years now, from when the government rolled it out to small businesses.
The first three years gradually ramped up my contributions to 8 per cent of my earnings. I was quick to realise those figures were not going to be anywhere near enough to accommodate a comfortable retirement, so I topped it up, paying in 23 per cent of my income in total. I also invested in the ethical fund.
Am I to be concerned with the lack of growth in my pension? After all the investment, and seven years, my pot has only grown by £900. Have the recent world events really hit pensions hard or is my Nest fund just not performing?
Tom’s answer: ‘Nest’ in this context stands for ‘National Employment Savings Trust’, the name of the pension scheme established by the government to support the flagship ‘automatic enrolment’ reforms introduced in 2012. Not everyone who is automatically enrolled into a pension will have their pension administered by Nest – it is up to your employer to choose a pension scheme on your behalf.
Not everyone who is employed will be auto-enrolled into a pension either – you need to meet certain criteria to qualify. You must be:
- Aged 22 or over,
- Earning at least £10,000 a year,
- Aged below state pension age (currently 66, rising to 67 by 2028).
Employers also have the option of deferring auto-enrolling new employees for up to three months. In addition, if you are self-employed you will not have access to a workplace pension with matched employer contributions.
Minimum contributions under auto-enrolment are 8 per cent of ‘qualifying earnings’, with 4 per cent of that coming via employee contributions, 3 per cent from the employer and the final one per cent via pension tax relief.
In the 2023/24 tax year, qualifying earnings against which contributions are calculated are earnings between £6,240 and £50,270. Businesses are free to pay contributions above this level, and many do as part of their employee benefits offering.
Your auto-enrolment contributions then need to be invested in a diversified mix of assets, with the aim of maximising long-term returns and ultimately the retirement pot you draw an income from, in line with your risk appetite.
If you do nothing, your pension will be invested in your scheme’s ‘default’ fund. This fund will be designed to be broadly appropriate for the entire membership of the pension scheme – and as such will not be tailored to your preferences and risk appetite. Auto-enrolment default funds are subject to a 0.75 per cent charge cap.
Your scheme may offer alternatives to the default, although these will not be covered by the 0.75 per cent charge cap.
Lack of growth a concern?
Turning to your specific question, the key to investing is to focus on the long-term, making sure your portfolio is diversified across sectors and geographies, and crucially, your costs and charges are kept as low as possible.
While it is understandable to be disappointed by the lack of growth in your pension, there are a couple of things to consider. Firstly, the global pandemic and subsequent inflation crisis has weighed on markets globally, meaning most retirement investors will have struggled to achieve any meaningful growth in their nest eggs in recent years.
Secondly, in the context of a retirement savings journey that might last 30 years or more, a period of seven years where your investments deliver less than you hoped for isn’t necessarily the end of the world. The key is that you’re comfortable with the way your money is being invested and the risks you are taking.
Transferring your pension
Most people saving for retirement in the workplace will not be able to choose which pension scheme their auto-enrolment contributions go to (although schemes such as Nest do usually offer a small selection of different funds outside the default).
If you are fundamentally unhappy with the way your investments are performing or don’t have the option of a fund that matches your goals and risk appetite within your auto-enrolment scheme, you can choose to transfer your existing pension to a different provider.
There are several potential benefits to doing this, including increased choice, greater flexibility when you come to taking a retirement income, and in some cases lower costs and charges. When it comes to investing, having a choice of investments can allow you to build a retirement strategy which better suits your personal preferences.
Before making the leap, you need to be clear of the risks as well. If you transfer your auto-enrolment pension, you will be leaving an environment protected by a 0.75 per cent charge cap and moving your money into a world without a charge cap.
It is perfectly possible to build a suitable, well-diversified retirement strategy for much less than 0.75 per cent in a pension outside auto-enrolment, such as a SIPP, but you need to be careful not to end up paying over the odds. Remember that investing is a long-term game, so you need to be comfortable with the risks you are taking and be prepared to ride out any short-term bumps in the road.
You also need to make sure you are transferring to a bona fide, FCA-regulated scheme that you trust. Although most scams are now outside of pensions, it is still vital to be sure your money isn’t at risk of falling into the wrong hands.
In addition, it’s worth checking you won’t lose any valuable guarantees or expose yourself to high exit charges by transferring your pension. This is more likely to be the case where someone has an older-style pension, as more modern schemes – including those used for auto-enrolment – don’t tend to have these features. It’s also worth speaking to your employer to see if they are willing to pay your auto-enrolment contributions into your chosen scheme.
