Pension Freedom  

How to make the right choices in accumulation

This article is part of
Guide to retirement income pathways

Steve Pennington, head of wealth planning at Arbuthnot Latham, points out using tax-advantaged vehicles greatly helps in the accumulation process.

“Making regular contributions into Isas and pensions allows for pound cost averaging, as the funds are invested in the market at different times,” he explains.

While Sir Steve says: “There is no single, right amount to save, but starting earlier and increasing gradually as wages rise is the best approach.

"In addition, maxing out on any employer contribution is likely to be the least painful way to build up a substantial pot.”

He explains a “rule of thumb” for building pre-retirement income:

  • A total income of around two-thirds of your pre-retirement income should allow you to glide into retirement with little noticeable change in living standards.
  • For someone on average earnings, the state pension will provide roughly one-third in retirement, so private savings need to contribute the other third.

He adds: “Current automatic-enrolment rates will probably only generate an income of around one-sixth of the average wage, and less than this for those who started pension saving later in life.”

Ricky Chan, chartered financial planner and director at IFS Wealth, says given that self-employed people need to pick their own funds when choosing a pension, using a simple, low-cost multi-asset global tracker fund or insurance company’s lifestyling fund should suffice.

He adds: “When values become more significant, then this should warrant using additional funds and/or a more bespoke portfolio of funds.”

Weighing the choices

Commentators stress that making the wrong accumulation choices can have a substantial long-term impact.

Mr Chan says: “[This is] Potentially very significant given the typical investment time horizons of over 40 years, so a small mistake at the start of the journey could be compounded to become a disastrous error if it’s not corrected early.”

Mr Pennington suggests there should also be a discussion about protecting the downside.

“What if things do not go to plan, or perhaps the breadwinner becomes ill or prematurely dies?” he questions.

Mr Pennington adds: “Using a protection plan (an insurance policy) can provide the needed funds when an unexpected/unforeseen event occurs and, as a result, the accumulation plan can still be achieved.”