Investing through a pension

A workplace pension is an investment account with tax relief and frequently an employer contribution, and it receives less attention than accounts a fraction of its size.

Why it dominates

The arithmetic.

Contributions receive tax relief, which means the cost to take-home pay is less than the amount invested.

Employer contributions add further, frequently matched to a level.

Returns accumulate free of tax within the wrapper in most systems.

And contributions are made automatically over decades.

Which produces, for most employees, the largest single pot of invested money they will hold — and the one they know least about.

The default fund

Where most members remain.

Automatic enrolment schemes place members in a default fund, and the large majority never change it.

Defaults are generally designed for an average member, which may not describe you.

What to check: the equity allocation, which drives the outcome; the charges, which compound over decades; the geographic allocation and any home bias; whether it is a target date fund and what glide path it uses; and what assumption the glide path makes about how you will take the money.

Which takes half an hour and is frequently the highest-value half hour available.

The glide path assumption

A specific issue.

Target date and lifestyle defaults reduce risk approaching an assumed retirement date.

The terminal allocation reflects an assumption about how the money will be used — annuity purchase, drawdown or lump sum.

Which means a default designed for annuity purchase de-risks in a way that is inappropriate for someone intending to remain invested through a thirty-year drawdown.

And that the assumed retirement date on the account is frequently the scheme's default rather than your intention.

Checking and correcting both is worthwhile.

Contribution rates

The variable that matters most.

Automatic enrolment minimums in several countries are widely considered inadequate for a comfortable retirement.

Employer matching structures frequently offer more than the minimum, and contributing below the matched level means declining part of your salary.

Which makes finding out the matching structure the first action.

And increasing contributions with each pay rise the most effective habit, since it captures the increase before it is absorbed.

Charges

Which compound.

Workplace schemes are subject to charge caps in several jurisdictions, which has reduced the worst outcomes.

Older schemes and personal pensions may carry considerably higher charges, sometimes with exit penalties.

A difference of a fraction of a percentage point over forty years produces a substantial difference in outcome.

Which makes checking the charge on every pension you hold worthwhile, particularly older ones.

Lost pensions

Extremely common.

People change jobs many times and leave small pots at addresses they have moved from.

Tracing services run by governments and industry bodies exist in many countries and are free.

Consolidating can reduce charges and simplify management.

The caution: some older schemes carry valuable guarantees — guaranteed annuity rates in particular — that are lost on transfer, and defined benefit transfers require regulated advice in many jurisdictions with a default position of not transferring.

Which means checking before consolidating rather than after.

Self-directed pensions

The alternative.

Personal pensions and self-invested arrangements allow choice of investments and platforms.

Which is useful for people who want a specific allocation, cheaper funds, or consolidation of multiple pots.

And which introduces the responsibility for the decisions, including the temptation to interfere.

For many people a low-cost workplace default is a better outcome than a self-managed alternative, which is worth acknowledging honestly.

The self-employed gap

A structural problem.

Without an employer, nobody enrols you and nobody contributes.

Self-employed pension participation is markedly lower than among employees in most countries.

Which produces a substantial retirement gap for a growing share of the workforce.

The practical response is setting up an automatic monthly contribution at the point of becoming self-employed rather than later, and directing a proportion of large payments to it.

Taking the money

Where the decisions are irreversible.

Options typically include annuity, drawdown, lump sums or a combination, with tax consequences that vary.

Free guidance services exist in several countries specifically for these decisions and are under-used.

Regulated advice is worth paying for given the amounts and the irreversibility.

And pension scams cluster around this point, with unsolicited approaches offering reviews, early access or unusual investments being the standard pattern.

The single action

If only one thing.

Log in, find out the employer matching structure, contribute enough to get all of it, and check the charge and the fund.

Which for most people does more than everything else in this section combined.

General information only, not investment advice. Pension rules vary enormously by country — use free guidance services and consult a regulated financial adviser.