What is a good pension pot?

What is a good pension pot?

We should all put money away for retirement – but what is a good pension pot?

When it comes to planning for retirement, many people are not aware that they should regularly review and compare their pensions to ensure they are getting a good deal.

There are several things to consider when deciding whether you have a good pension pot, including charges, investment choice and how you can access your savings. However, getting to grips with the various types of  pension and all the options that might be available to you is not always easy, so if you are not comfortable doing it alone, you may prefer to get a professional pension adviser to check your pension on your behalf. 

Remember that the value of your pension is vital. Based on the average UK pension pot the State Pension alone is unlikely to be enough to provide you with a comfortable retirement. According to the Pensions and Lifetime Savings Association, a pensioner would need a minimum income of £10,200 to live a “basic” lifestyle in retirement, which is more than the current maximum new State Pension of just over £9,100 a year*. Many people will get less than this, as you need 35 years of qualifying contributions to get the full State Pension. You can find out how much State Pension you are likely to get at Yourpension.gov.uk. 

To check you are saving enough into your pension, Profile Pensions’ pension calculator works out how much you can expect from the State Pension, and estimates the annual income you will need in retirement to maintain a comfortable or modest lifestyle.

Longing for early retirement? The pension pot calculator has a sliding scale to adjust your retirement age, revealing how much you would need to save in order to retire at a specific age.

Here are some of the factors all of us should think about when deciding if we have a good pension pot – or not. 

Do you benefit from employer contributions?

If you are employed and have signed up to your company’s workplace pension scheme, your retirement savings will be boosted by employee contributions. Under pension auto-enrolment rules, the minimum total auto-enrolment contributions is 8 per cent. So if your employer is contributing the minimum 3 per cent, then you must contribute 5 per cent. This can vary, though, so for example if your employer is contributing 4 per cent, you would also contribute 4 per cent to make it up to 8 per cent. You can pay in more than this if you’re able to, and your employer may make more generous contributions too.

Does your pension pot offer flexible access? 

Pension freedom rules introduced in 2015 gave people much greater flexibility and choice over how and when they access their pensions. Flexible options include being able to take up to 25 per cent of your total pension savings tax-free at the age of 55 or over, accessing your pension while continuing to work, and using what’s known as “flexi-access drawdown” to take payments from your pension pot as and when you need to. Different pensions have different rules for accessing funds, so it’s important to check what your particular scheme offers, as not all will provide flexible options. 

For example, according to data from Profile Pensions, 94 per cent of people with defined contribution pensions – where the amount you get at retirement depends on how much you paid in, and how your investments have performed – have at least one pension that does not offer flexible access**. Yet a third of people would like to take a one-off lump sum from their pension***, but may not be able to if their pension does not allow it. Another key advantage of having a flexible pension is that you can nominate who you would like your retirement savings to go to when you die, whereas if, for example, you use some or all of your pension to buy an annuity or income for life, this cannot usually be passed on to a beneficiary.

How much are you paying for your pension?

Most of us are used to checking charges on things like our credit card or mobile phone bills, but many people don’t have any idea about their pension cost . Pension charges eat into your investment returns and can have a significant impact on the amount you end up with at retirement, especially once you factor in the compound returns you would have earned on the money that has gone towards fees. Although investment returns go up and down, compound returns is when the growth on your pension is reinvested and has the potential to start growing on its own, you are essentially earning returns on your returns.

A good pension will keep fees to a minimum. For example, some have annual charges as low as 0.4 per cent, but many will charge more than three times this amount, so it’s vital to find out if you are paying over the odds. If you’re in any doubt about the effect charges can have on your pension, research from Profile Pensions found that reducing pension charges by 67 per cent could save you as much as £11,152 over 15 years, enough to provide your retirement savings with a substantial boost.****

Does your pension suit your attitude to risk? 

A good pension will offer a wide range of investment funds, investing in different asset types and geographical areas, so that you can choose the ones which suit your approach to risk. 

If your current pension does not suit your attitude to risk, it may not be the right option for you. Pension providers often show a “risk score” alongside the funds they offer so you can see how risky each fund is. 

To help you judge whether your pension matches your attitude to risk, find out what proportion is invested in shares – the top end of the risk spectrum – and what proportion is invested in bonds, cash and other lower risk investments. 

Remember too that it’s important to review your pension investment choices regularly so you can be certain you are still comfortable with the level of risk you are taking as you approach retirement. As a general rule, the younger you are when you start saving into a pension, the greater the risk you may be prepared to accept because, even if you suffer a setback, hopefully there will be plenty of time for your investments to recover. That said, it is never too late to start saving for your retirement and the more you are able to put away, the better. 

Whatever age you are, it’s a good idea to seek professional pension advice to make sure you’re on the right track and that your pension is working as hard as it possibly can for you. 

Capital at risk. Past performance is not a guide to future performance. This website does not constitute personal advice. If you are in doubt as to the suitability of an investment, please contact one of Profile Pensions’ advisers. Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change.

Telegraph Media Group Limited is an Introducer Appointed Representative of Profile Pensions, a trading name of Profile Financial Solutions Limited, which is authorised and regulated by the Financial Conduct Authority. FCA Number 596398. Registered in England & Wales, Company Number 07731925. Registered Office address: Norwest Court, Guildhall Street, Preston PR1 3NU


**1,717 pensions reviewed between October 2019 and March 2020

*** 32 per cent of Profile Pensions’ database, based on 11,667 responses to “Do you intend to take a one-off lump sum from your pension? May 2019 to March 2020

**** Based on a pension value of £50,000 growing at 5% a year with charges 0.4% and 1.2% applied. All figures quoted are for illustration purposes only and may be higher or lower than illustrated.

Information correct at date of publication.