Depending on how old you are, or how close you consider yourself to being able to retire, your pension is going to be your primary growth engine to maximise your future wealth. Note that I’m excluding property investment from the equation here. You know that I like property as an asset class, it’s just not a part of our discussions here about pensions, ISAs and platforms ’n’ stuff.
Because your pension is likely to be a long-term play, you really should work it as hard as you possibly can. Because your pension is likely to be running for a long time, it has the longest to compound.
It also has the clear benefit of tax relief meaning that you get the most bang for every buck – or pound – that you put in. If you’re employed and your boss is paying in, this is even better as you’re getting their money too. In practice this means three things:
- You should push the investments inside your pension as hard as you can
- You should maximise your contributions to it
- You should keep costs as low as possible
Taking these one at a time:
Risk is a function of time. Let’s agree that the longer you hold an investment, the more its average annual return reverts to the mean. In practice this means that you should possibly take more risk, for which read you should have a higher equity content in your portfolio, in your pension than you may do in other pots you have.
Wow, that was a couple of nasty compound sentences! To put it more simply, if it’s going to be ages before you access the money, you should take more risk with it.
Because of the benefits of tax relief and possibly employer money going in, there is often more money going into a pension pot than you have personally put in. That means there’s more to compound and grow for the future. We get an accelerant right at the start, so we should maximise that.
Costs are compounded too, so you need to keep costs low to minimise that effect. Look for the right charging structure on your platform based on your underlying investments, and make sure you keep the costs of those investments down too.
Don’t attract unnecessary dealing fees by keeping tweaking to a minimum. Tax is really not an issue because there is no tax as the money grows, so you don’t need to worry about rebalancing your portfolio very often. Personally, I do it once a year.
Pensions are easily left, especially when we move from one job to another. But don’t do this, stay on top of things by keeping them together. The number of people I see with pension pots from a previous job still in default funds is not good.
Don’t put this off. Get all the details of your existing pensions together and see if you’re better off tidying them up. I did a whole session on this a couple of years ago – access it here.
If you’re in a workplace pension, that should be the main home for your long-term savings, but you can have a personal pension or SIPP on the side, which becomes a repository for all your old pensions. Again, check that old episode because it can sometimes make sense to leave an old pension in place if it has useful benefits.
But generally, your workplace pension is where it’s at. You should work it hard, choose investments accordingly, keep costs down and don’t leave old pensions to linger. Sort them out, tidy them up and be intentional about them.
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