Three things you should know about your pension savings

13 November 2024

Written by Retirement Line

Senior Annuity Specialist

Recent reports suggest a positive trend: people are showing greater interest in understanding and managing their pensions. 

According to the findings in Boring Money’s ‘Pension Report 2024 – The Consumer Focus’, over two-thirds (67%) have checked their pension annual statement so far in 2024, compared to 59% in 2022. With the year not out yet, there’s room for the figure to grow even further.

Additionally:

• 60% have logged into an online pension account in 2024, compared to 52% in 2022.

• 6% have opened a new private pension, up from 4% in 2022. 

• 8% have consolidated their pension pots this year, compared to 5% in 2022. 

This increased engagement signals that many are waking up to the realisation that pensions are the bedrock of financial security for retirement. The fact is, whether you’re close to retirement or just starting to think about it, understanding a few key elements of your pension savings can make a big difference in your future income and lifestyle.

Everyone should get hands-on with their retirement funds, so here are three things that you should know about your pension savings. We explore essential aspects of pension savings, from understanding where your money is invested to estimating your retirement income and knowing when to adjust your investment approach.

1. Where are your pension savings?

The first step to understanding your pension savings is knowing where they are. In the UK we typically have pension savings in two main types of schemes:

• Defined contribution (DC) schemes. In a DC scheme, you make contributions to your fund when you wish. If you are a member of a workplace DC pension scheme, you and your employer will typically make regular contributions to it, usually based on a percentage of your salary. The value of your pension pot depends on how much is paid in and the performance of the investments made with this money. DC pensions are common for employees in both private and public sectors today.

• Defined benefit (DB) schemes. DB schemes, also known as final salary schemes, promise a set retirement income based on your salary and length of service with an employer. While they’re increasingly rare, those who still have access to a DB scheme enjoy a guaranteed income in retirement.

If you have worked for different employers over the years, your pension money might be spread across multiple pension funds, making it harder to keep track of everything. 

It's worth checking where each pension pot is held and looking for any pots you may have lost track of. You can use tools like the government's Pension Tracing Service or read Retirement Line’s guide to tracing lost pensions to find out more.

2. What’s your potential retirement income?

The ultimate goal of pension savings is to secure a stable income for retirement, so it’s essential to know how much you can expect from your schemes. Here’s a breakdown of what each might provide:

Income from defined contribution (DC) schemes

With a DC scheme, the amount of retirement income you’ll receive depends on factors like how much you’ve saved, how long your investments have had to grow, and the performance of the investments within the scheme. 

From age 55 (changing to age 57 in 2028), you may have options to buy an annuity, move your money into a drawdown scheme or take your pension savings as a tax lump sum. Knowing your pot size and how it could translate into income can help you decide what’s right for you.

Income from defined benefit (DB) schemes

DB pensions provide a fixed income based on your salary and years of service with an employer, making it easier to predict how much you’ll receive each month. 

As this income is guaranteed, you may find it provides a solid base for retirement planning. However, if you have both DB and DC schemes, it’s wise to understand how these might work together to support your lifestyle.

Reviewing your projected income from both sources will help you feel more in control of your financial future, especially as retirement approaches. You’ll get a clearer idea of whether you’re on track to maintain your lifestyle or need to boost your savings to cover any shortfall.

Income from the State Pension

Alongside income from your workplace and private pensions, the State Pension can play a vital role in supporting your retirement. 

If you've built up sufficient National Insurance contributions, you may qualify for the full new State Pension, which is currently £221.20 per week (2024-25 tax year). While this amount alone may not cover all your expenses, understanding how it fits into your broader retirement income can give you a clearer idea of what additional income you may need. 

It’s worth checking your State Pension forecast online to see what you’re on track to receive and, if necessary, explore ways to fill any gaps in contributions.

3. How are your pension savings invested?

Your investment decisions for defined contribution schemes play a significant role in determining the value of your pension pot. 

Pensions typically grow over time by your pension scheme investing in a mix of assets, such as bonds, cash, property, company shares and commodities. Investing involves buying these assets to hopefully achieve growth over time.

Typically, your pension will hold a balanced combination of these assets, though the mix may shift as you near retirement. This approach, called diversification, helps manage risk by spreading it across different types of investments, as each asset class tends to perform differently. 

You may have chosen your own investments from a selection of funds, or you could be in a ready-made option, where professionals manage the investments on your behalf—often called a ‘lifestyle profile’.

It’s important to be aware of the level of risk selected for your pension fund, especially as retirement nears:

• Early and mid-career. During these phases, you might find that taking a higher level of risk may be suitable as you have more time for investments to recover from potential downturns. Growth-focused funds, which invest in stocks and shares, can help increase the size of your pension pot over time, although they also carry more risk.

• Approaching retirement. As you approach retirement, it may make sense to gradually move your savings into lower-risk investments to protect the value of your pension pot. This is a process known as ‘lifestyling’. Otherwise, a sudden market dip close to your retirement date could reduce your retirement income significantly. Many pension providers offer lifestyle or default funds, which automatically reduce investment risk as you near retirement age.

Of course, not everyone wishes to take the same approach. The above examples may not apply to your circumstances or preferred approach to investment risk.

You can often check the details of your investments online or via your provider’s app. If these options aren’t available, you can contact your provider directly.

It’s wise to regularly review your investments to ensure they align with your retirement goals and comfort with risk. As you near or enter retirement, keep in mind that your pension has less time to recover from market dips than someone with a longer investment horizon.

Visit the government-backed MoneyHelper service for more information on pension investment options.

Staying engaged with your pension savings

Regularly engaging with your pension, no matter your age or proximity to retirement, can greatly improve your financial security in retirement. By taking an active role in understanding your pension’s performance and making adjustments along the way, you’re more likely to achieve the retirement lifestyle you want.

Consider setting aside time each year for some essential pension housekeeping. Review your pension balance, adjust contributions if you wish to do so, and check how your investments are performing. 

Many providers now offer online access or apps to make these reviews easier. If you find it challenging to remember, setting reminders can help make these tasks part of your routine.

If you’ve been hands-off with your pension so far, it’s reassuring to know that it’s never too late to get involved. Even small changes in contributions or investment choices can have a big impact over time. Here are some handy tips:

1 - Use your pension statements as a guide

Your annual pension statements provide a valuable snapshot of your pension's health. Statements outline key details like your total contributions, current fund value and an estimate of your future retirement income. Reviewing this each year can help you see if you’re on track or if adjustments are needed.

2 - Take advantage of pension dashboards

Look out for new pension dashboards, expected to roll out widely in the next few years. They will bring together all your pension information from different providers in one place, making it simpler to see your entire pension picture.

3 - Reassess your goals and contributions

Life circumstances change, and so can your financial goals. If you aren’t on track to achieve yours then consider increasing the percentage amount you contribute. Pay rises are a good opportunity to review how much extra you can afford to put in. 

4 - Consider future-proofing with regular projections

Some pension providers offer online tools and portals to help you project your future pension income based on your current contributions and investment strategy. These projections can help you decide when and how to draw from your pension, and even if you may need additional savings to cover any gaps in your retirement budget. 

Final thoughts

Understanding your pension savings is a key part of planning for a comfortable retirement. By familiarising yourself with where your pension money is stored, what kind of retirement income you can expect, how your money is invested, and the tax implications of your decisions, you can take control of your retirement journey. 

Increased engagement with pension savings is a promising trend, and for good reason — the more you know, the more prepared you’ll be to make the most of your retirement funds.