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How to get the pensions accumulation strategy right

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How workplace pensions fit into a client's financial plan

How to get the pensions accumulation strategy right

There are two main things to consider when it comes to accumulation within a workplace pensions context: the contribution levels and the investment strategy.

Education, information and communication are also important factors, but in terms of managing the long-term performance and viability of the pension pot, members must understand how contributions work, and they must also be given the security of having a robustly-run portfolio.

Contributions 

Obviously, with defined contribution (DC) workplace pensions, performance matters when it comes to the underlying investment strategy.

But are people putting enough away in a workplace scheme in the first place to benefit from any underlying investment performance?

One of the best ways in which workplace pensions help to boost people’s investments is by matching contributions.

For example, if the scheme member pays in £1, the company sponsoring the scheme may pay in £1 or £2 depending on how generous the scheme is.

With the additional contributions and the tax lift, this can help make a significant difference to a person’s pension pot at the end of their working life.

However, the age-old question is ‘how much is enough?’ Already contributions are to rise this year to 5 per cent in total, and to 8 per cent in total in 2019 with regards to auto-enrolment pensions.

But experts from across the pensions world have also suggested a 10 per cent, 12 per cent or even 15 per cent contribution is needed to ensure people have a comfortable retirement.

Neil Adams, head of pension planning at Drewberry Wealth, believes having a conversation about contribution rates is an essential starting-point.

“Encouraging more than the minimum contribution under auto-enrolment is perhaps the biggest way in which advisers can help get the accumulation strategy right.

“The danger with auto-enrolment”, Mr Adams continues, “is that people get complacent because they know they have a pension, when in reality just paying in the minimum contributions is unlikely to be enough.”

Carolyn Jones, head of pensions product at Fidelity International, agrees it is important to "continue to make the case" for contributing more, not opting out of auto-enrolment pensions.

"It doesn’t take Stephen Hawking to appreciate the phenomenal rate of return on personal contributions as the magic duo of tax relief and employer contributions boost pension pots.

“As the state continues to tussle with the challenges of an ageing society, saving for retirement is no longer a ‘nice to have’. It is an essential part of financial planning."

And for more vulnerable groups such as women, she says this is even more important. "Women are more likely to be part-time workers or have career breaks which can subsequently lead to smaller private pension pots. Any additional help they can get to boost savings should not be turned down," she adds.