Whether you have a workplace pension, personal pension, SIPP – or a combination of pension plans – it's important to understand how and where your pension fund is being invested by your pension provider, particularly as you move closer to retirement.
We look closer at what a pension fund is and how you can choose the right one for your circ*mstances below.
What is a pension fund?
Essentially, a pension fund is a long-term, tax-efficient savings plan that you can access in later life when you want to work less or retire. Pension funds are made up of a portfolio of assets in which your pension contributions are invested, such as stocks and shares, bonds, cash and commercial property.
You can receive a pension from three different sources: the state, personal pensions that you've set up yourself, and workplace pensions from employers. Depending on the type of pension you have, you may be able to choose how your pension contributions are invested to best suit your plans and circ*mstances.
What are the fund options for my workplace pension?
Workplace pensions come in two types:
- Defined contribution scheme
Most workplace pensions today are this type of scheme
- Defined benefit scheme
Also called 'final salary scheme', these type of schemes are less common but still widely used in the public sector
If you have a workplace defined contribution scheme, your employer may offer you a default investment fund. This investment strategy is for people who can't or don't want to make their own pension decisions and is designed to reduce risk as the pension saver approaches retirement age.
In some instances, you may choose an investment fund yourself – this depends on the terms of the workplace pension scheme. You can do this by speaking to your pension provider or viewing your pension plan online and looking through the fund options. You may find it helpful to seek financial advice to help you decide which are most suitable.
If you're a member of a defined benefit scheme, it's your employer who takes the investment decisions and risks needed to reach the pension target that's been set. However, you may still need to make pension investment decisions at some point, for example, if you want to boost your pension savings by making additional contributions to a defined contribution scheme.
What fund options do I have with a personal pension?
If you have a personal pension, stakeholder pension or self-invested pension plan (SIPP), you'll have a say in how your money is invested.
Your pension provider will offer a range of investment funds that are designed to invest your money in different ways over the years until your retirement. Again, there's usually a default option that invests in a broad range of funds to suit a wide range of people.
You'll probably be offered a choice of funds that:
- Specialise in specific assets –such as a fund focusing on shares in European companies
- Invest in a mix of different assets – such as a fund investing in both global shares and government bonds
Most people choose to invest their pension in a blend of assets because spreading – or 'diversifying' – your investments is a good way of managing risk.
SIPPs, in particular, are flexible plans that provide access to a wide range of assets and give you more control over how your money is managed. However, this option is best suited to those who have good financial knowledge and are comfortable making their own investment decisions.
You can compare our selection of the best SIPP accounts here.
How do I choose the right pension fund for me?
Choosing a pension fund is a tricky decision, and generally isn't one to be made without first seeking independent financial advice. Your IFA will guide you on the best choice of funds to suit your particular stage of life and long term goals.
That said, there are certain broad strategies that their advice may follow. As a rule it makes sense to spread your money across different assets, sectors or geographic regions – rather than putting all your eggs into one basket. Many basic managed funds do this for you, but if you want to take a more active role, start by looking in detail at how you spread your risk across a range of investments.
You should also consider your 'investment style' and what you feel comfortable with, for example:
- Cautious
Your aptitude to risk is low, so you'll want to invest in lower-risk assets.
- Aggressive
You have a high tolerance to risk (meaning, you can afford to make losses - perhaps because you are many years away from retirement) and are happy to invest in higher-risk assets for potentially higher returns.
- Balanced
You'd like a balanced mix of higher and lower risk assets.
There are thousands of investment funds available to UK investors offering a wide range of options and levels of risk, including:
- Asset type (equity, fixed interest, property or cash funds)
- Investment in specific geographical areas (country or region-specific funds)
- Risk-adjusted funds where assets are chosen to suit a particular risk profile or investment style (cautious, balanced or aggressive funds)
- Combination funds which combine a number of the different sectors listed above (these include managed funds)
- Funds that alter their risk profile as you approach a target date (lifestyle funds)
Investing in pensions funds is a complex matter, so you may find it helpful to speak to a professional financial adviser who can explain the intricacies of each option in more detail to help you make the best choice.
What's the difference between active and passive funds? Which is better?
One of the biggest debates in investment revolves around the subject of active funds versus passive funds. Some investors believe it's best to invest in an actively managed fund, where a fund manager and team of financial analysts pick the shares they think will perform best. Others believe the best option is a passively managed fund, which mirrors the ups and downs of a specific market index. Here's a summary of both:
- Passive funds, also known as trackers, are one of the simplest ways to invest. A passive fund aims to 'track' the performance of a stock market index, such as the FTSE 100. They're known as passive funds because the fund manager isn't making any active decisions about which shares will perform best. Because they require no investment analysis, costs are much lower, which some see as a key advantage because charges eat into investment returns over time
- Active funds seek to outperform an index. The fund manager will invest in companies they believe will perform better than the average to do this. Because there's a fund manager and analysts to pay for, actively managed funds have higher charges
Do I need to change pension funds?
Choosing the right pension fund is important if you want to make the most of your investment. A young person just starting their career, or someone who has a higher tolerance for risk will opt for a different portfolio of assets than someone in the last few years before retirement who'd prefer a low-risk pension fund, particularly if they want the guaranteed income of an annuity.
As a guide, if you're less than 15 years away from retirement, it's a good idea to start moving some of your pension investments from funds that invest primarily in shares to ones that invest in bonds (learn more about premium bonds here) and cash. Many personal, stakeholder and workplace defined contribution pension plans offer a 'lifestyle' fund, which automatically shifts the balance of your investments towards less risky investments as you get closer to retirement.
If your pension isn't in a lifestyle or target-date fund, you can reduce the risk yourself by switching your pension from riskier funds to ones that have a lower risk. You might be able to do this easily online on your pension provider's website, although worth consulting a financial adviser unless you're confident about selecting the suitable funds. If you decide to switch funds, check if there's a switching fee and what the charges on the new funds will be.
Can I invest in more than one fund?
Defined contribution pension schemes usually offer a range of different funds in which to invest your contributions. Your pension provider should provide detailed information about the various options available to you on a fund fact sheet. Before you invest in a fund, you should be given a Key Investor Information Document (KIID). This will explain the fund's investment objectives, charges and other information.
Can a financial adviser help me choose the right funds?
If you need help choosing a pension fund or want to review your retirement options, particularly in the decade before you plan to retire, speak to a financial adviser. Regulated financial advisers are authorised to give you advice and recommend suitable pensions products and investment options so you can look forward to a comfortable, financially secure retirement.
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FAQs
Go for pension plan with a vesting age that matches your needs. There are some pension plans with vesting age starting at 40 years. So if you want an income stream that early on in life, go for such a plan. On the other hand, there are plans with vesting age at 85 years, which is suitable if you plan to retire late.
How do I choose the best pension fund? ›
Go for pension plan with a vesting age that matches your needs. There are some pension plans with vesting age starting at 40 years. So if you want an income stream that early on in life, go for such a plan. On the other hand, there are plans with vesting age at 85 years, which is suitable if you plan to retire late.
How do I choose a pension fund UK? ›
Tips for choosing a personal pension
compare products from different providers. Ask for the key facts document for each pension plan you are considering. This is a summary of all the important facts about the pension plan. Providers are required to give you this information and you can make a complaint if they don't.
What is the most ethical pension fund in the UK? ›
Top performers with strong sustainable investment policies include the Liontrust Sustainable Future range, all of which are available through Aviva. Others include Royal London Ethical Bond, Rathbone Ethical Bond, Baillie Gifford Responsible Global Equity funds, and the Pictet Multi-Asset Portfolio.
Which government pension scheme is best UK? ›
Best UK pension providers
| Provider | Product Types | Good for |
|---|
| Moneyfarm* | SIPP | Ready-made |
| Penfold* | SIPP | Ready-made |
| PensionBee* | SIPP | Ready-made |
| Wealthify* | SIPP | Ready-made |
7 more rowsMar 28, 2023
Top 7 Government-Backed Senior Citizen Pension Schemes 2023
- Pension Schemes for Senior Citizens at a Glance.
- Varishtha Pension Bima Yojana - VPBY.
- Employees Provident Fund - EPF.
- Senior Citizens Savings Scheme - SCSS.
- Pradhan Mantri Vaya Vandana Yojana - PMVVY.
- National Pension System -NPS.
- Atal Pension Yojana - APY.
Defined benefit pension plans can be further subdivided into three types: single employer, agent multiemployer, and cost-sharing multiplier.
What is a good private pension UK? ›
What is a good pension amount? Some advisers recommend that you save up 10 times your average working-life salary by the time you retire. So if your average salary is £30,000 you should aim for a pension pot of around £300,000. Another top tip is that you should save 12.5 per cent of your monthly salary.
What is the average pension fund in the UK? ›
To clarify, it's important to remember that this is the average pension size, so what the average person in the UK has in their pension, and not the recommended pension size to have a comfortable retirement.
...
Average pension pot by age (UK)
| Age | Average pension pot |
|---|
| 25-34 | £9,300 |
| 35-44 | £30,000 |
| 45-54 | £75,500 |
| 55-64 | £107,300 |
1 more row6 days ago
If you take your pension before age 65, your monthly benefit amount is reduced from what it would have been if you had waited until age 65. Similarly, for each month after age 65 that you wait to begin your pension, your monthly benefit is increased.
According to a recent survey, Iceland, the Netherlands and Denmark have the world's best pension system.
Are UK pension funds safe? ›
Typically up to £85,000 per person per institution is fully protected if your bank goes bust. This protection's provided by the UK's Financial Services Compensation Scheme (FSCS). This £85,000 limit also covers pensions and investments.
Are UK private pensions at risk? ›
It's important to understand that your private pension is safe if you use a provider that has been authorised by the Financial Conduct Authority (FCA). The FSCS has protection for different scenarios: Your private pension provider fails – the FSCS will cover 100% of your claim with no upper limit.
Is it better to take a higher lump sum or pension UK? ›
Invest how you want: If you want to continue growing the value of your pension, taking a lump sum gives you more freedom to invest in a way that suits you. This approach could yield higher returns, but, of course, there's always the chance that your pension will decrease in value at points too.
Is Royal London a good pension provider? ›
In 2022 its Workplace Pensions and Drawdown products received a 5 star rating from Defaqto. It also received a 5 star rating for its group pensions service for the second year in a row at the Corporate Adviser Awards in 2022.
What is better than a private pension? ›
For those who feel more comfortable with risk, another traditional pension alternative is to invest in stocks and shares, property or other asset classes to save for retirement. There are lots of different investments that an individual could make, such as a buy-to-let property or investing in a commodity like gold.
Should I take a lump sum or monthly pension? ›
A monthly pension payment gives you a fixed amount every month over your whole life, so you don't have to worry about changes in the stock market. In contrast, a lump-sum payout can give you the flexibility of choosing where to invest or save your money, and when and how much to withdraw.
Is a pension better than a retirement plan? ›
Pensions offer greater stability than 401(k) plans. With your pension, you are guaranteed a fixed monthly payment every month when you retire. Because it's a fixed amount, you'll be able to budget based on steady payments from your pension and Social Security benefits. A 401(k) is less stable.
What is the most common pension plan? ›
The most prevalent defined contribution plan type are savings and thrift. Defined benefit plans provide employees with guaranteed retirement benefits based on a benefit formula. A participant's retirement age, length of service, and preretirement earnings may affect the benefits received.
What is the riskiest type of pension? ›
Only defined-benefit pension plans can be at risk of underfunding because an employee, not the employer, bears the investment risk in defined-contribution plans.
For more recent data, Fidelity Investments reported that in the third quarter of 2022 the average account balance for an IRA was $101,900. Employees with a 401(k) averaged $97,200, while those with a 403(b) had $87,400.
What types of pensions affect Social Security benefits? ›
The Government Pension Offset, or GPO, affects spouses, widows, and widowers with pensions from a federal, state, or local government job. It reduces their Social Security benefits in some cases.
What is a comfortable pension UK? ›
What is a comfortable retirement income for couples? According to research (2021), couples in the UK need a minimum retirement income of £15,700, to live a moderate lifestyle for £29,100 or £47,500 to live comfortably. These stats are a national average outside of London, and your circ*mstances could be different.
How much pension do you need to be comfortable in the UK? ›
In 2022 the minimum required to survive as a single pensioner jumped by 18% to £12,800 a year. Meanwhile, a retired couple now need a minimum of £19,900 a year – up £3,200, an even bigger rise of 19%, according to a study funded by the Pensions and Lifetime Savings Association (PLSA) at Loughborough University.
What is a good pension amount per month? ›
Average Monthly Retirement Income
According to data from the BLS, average incomes in 2021 after taxes were as follows for older households: 65-74 years: $59,872 per year or $4,989 per month. 75 and older: $43,217 per year or $3,601 per month.
How much is a luxury retirement UK? ›
And to fund a luxury retirement, where you're free to embark on long-haul trips, purchase new cars and live life to the fullest, you'll need £31,000 for one or £41,000 for a couple.
What is the average pension at 65 in the UK? ›
Average personal pension pots by age
| Age | 25th percentile | Median (50th percentile) |
|---|
| 35-44 | 7,000 | 20,000 |
| 45-54 | 15,000 | 37,700 |
| 55-64 | 21,000 | 52,000 |
| 65+ | 28,000 | 66,500 |
2 more rowsAt retirement, the average pension pot is £50,000 but men are in a better position, according to research from insurer Aegon. They have a nest egg worth £73,600 in total, while the average woman has a meagre £24,900.
How do I get the $16728 Social Security bonus? ›
To acquire the full amount, you need to maximize your working life and begin collecting your check until age 70. Another way to maximize your check is by asking for a raise every two or three years. Moving companies throughout your career is another way to prove your worth, and generate more money.
What is the Social Security 5 year rule? ›
You must have worked and paid Social Security taxes in five of the last 10 years. • If you also get a pension from a job where you didn't pay Social Security taxes (e.g., a civil service or teacher's pension), your Social Security benefit might be reduced.
Social Security benefits may or may not be taxed after 62, depending in large part on other income earned. Those only receiving Social Security benefits do not have to pay federal income taxes.
Which state has the best pension plan in USA? ›
Based on funded ratio, Wisconsin, Washington, and South Dakota have the best funded public pension plans in America. The worst funded plans are in Illinois, Kentucky, and New Jersey.
What is the #1 retirement country? ›
According to various studies, including International Living, Portugal is ranked as the best country for US expats to retire to. Its friendly population, welcoming community of American expats, excellent weather, safety records, and affordable cost of living are all big draws for retirees.
Which European country has the best pension system? ›
Finland is the best country for pensions
With high public expenditure on pensions, and a strong percentage of the population paying into a pension, Finnish nationals can really make the most of their retirement.
What happens if pension fund collapses? ›
The PPF might step in and pay members retirement income as compensation if employers become insolvent and the scheme doesn't have enough funds to pay their benefits. The scheme actuary will carry out a valuation to see if the assets would support at least the compensation provided by the Pension Protection Fund (PPF).
What happens to my pension if Royal London goes bust? ›
If they're unable to do this, you'll get back 90% of the amount you have saved in your pension up to £85,000 per person per institution. While the FSCS safety net will cover you if your pension or investment firm has gone out of business, it generally won't cover performance losses from investments.
What happens to unclaimed pensions UK? ›
Dormant account are accounts which haven't been touched for many years, despite attempts by financial services businesses to get in touch with the owners. Once an account is identified as being dormant, the money is moved into a central fund which is put towards good causes through the Big Lottery Fund.
Are UK private pensions tax free? ›
You can usually take up to 25% of the amount built up in any pension as a tax-free lump sum. This is limited to a maximum of 25% of your available lifetime allowance. For most individuals, the standard lifetime allowance applies. This is currently £1,073,100.
What are the disadvantages of having a private pension? ›
Disadvantages
- Pension drawdown income is not guaranteed and there is a risk that you may run out of money in retirement.
- If your investments perform poorly you may need to reduce the income you take.
- You will need to regularly review your investments to ensure you are still on track.
At least 17% of people in the UK aged 55 and over admit to having no pension savings (other than the State Pension), which is only slightly better than the average for Brits as a whole – 21% of whom say they have no private pensions.
The biggest risk is that your pension is no longer guaranteed to last for life because investment volatility could impact growth. You're only partially protected from creditors. The lump sum amount you receive requires careful asset management to ensure you have enough to live on for the rest of your life.
What is the maximum tax free pension lump sum UK? ›
From 6 April 2023, the amount of tax-free lump sum you can take is 25% of your pension pot, up to a maximum of 25% of the standard lifetime allowance. The current lifetime allowance is £1,073,100.
Does a lump sum pension affect Social Security? ›
Receiving a lump sum pension payment won't affect your Social Security benefit amount assuming that you didn't work for an employer that was exempt from withholding U.S. Social Security taxes. It probably will raise your Part B Medicare premium rate, though, at least for one calendar year.
How do I choose a good pension provider? ›
Tips for choosing a personal pension
compare products from different providers. Ask for the key facts document for each pension plan you are considering. This is a summary of all the important facts about the pension plan. Providers are required to give you this information and you can make a complaint if they don't.
Who are the most sustainable pension providers UK? ›
Top performers with strong sustainable investment policies include the Liontrust Sustainable Future range, all of which are available through Aviva. Others include Royal London Ethical Bond, Rathbone Ethical Bond, Baillie Gifford Responsible Global Equity funds, and the Pictet Multi-Asset Portfolio.
Which pension fund is performing well? ›
Ten best-performing pension funds
| Fund | 3 yrs (%) |
|---|
| Zurich Jupiter Distribution | 23.13 |
| MetLife Jupiter Distribution | 22.79 |
| L&G Jupiter Distribution | 22.77 |
| MetLife Defensive Managed Portfolio | 22.53 |
6 more rowsIn the vast majority of cases, no. If the pension is from an employer that withheld FICA taxes from your paychecks, as almost all do, it won't affect your Social Security retirement benefits. Join our fight to protect Social Security.
Do I need to save if I have a pension? ›
The short answer is yes.
Is it best to put all pensions into one? ›
If you have several pension pots, there are potential advantages if you combine them into one. If you combine them, you: can keep track of, and manage, your pension savings more easily. might save money if you can move from a higher-cost scheme to a lower-cost one.
What makes a good pension fund? ›
A good pension pot is one that can provide you with enough money during your retirement. The amount you need depends on how many years you have left until retirement and the income you want when you're retired. A tool like the PensionBee pension calculator can help you work this out.
You might want to take your entire pension pot in one go for any number of reasons. For example, to clear debts, pay for a holiday, or splash out on a big purchase. But be aware that it will reduce the money you'll have to live on when you retire. And you could end up with a big tax bill.
What is the best percentage for pension? ›
How Much Should I Save for Retirement? It is a good idea to save a percentage of your paycheck each month. If you can afford it, 15% of your annual salary, is recommended.
Is it worth combining all pensions? ›
Save on fees. Combining your pensions could save you money on charges. If you have got multiple plans, you will be paying for the administration of each one which makes it difficult to keep track of the overall cost. It's also not very cost-effective, especially if some of the providers are expensive.
Does it matter if I have multiple pensions? ›
If you leave an employer, or as you get close to the date when you can begin taking an income from your pensions, it might be possible to start bringing your pensions together. There's no restriction on the number of different pension schemes that you can belong to.
Should I take my pension in one lump sum? ›
The Bottom Line. For some, a lump-sum pension payment makes sense. For others, having less to upfront capital is better. In either case, pension payments should be used responsibility with the mindset of having these resources support you throughout your retirement.
What is a decent pension? ›
The 50 – 70 rule is a quick estimate of how much you could spend during your retirement. It suggests that you should aim for an annual income that is between 50% and 70% of your working income.
What is the average pension payout? ›
What Is the Average Retirement Income? For adults 65 and older, the average income is $75,254, according to the most recent research published by the U.S. Census Bureau in 2022. The median income, on the other hand, is $47,620. Adjusted for inflation in 2023, those numbers become $83,085 and $52,575.
Is it better to save or put in pension? ›
The big advantage of saving or investing outside a pension is that you'll be able to use the money earlier if you want to, whereas pensions can't be accessed until after the age of 55. A savings account has more flexibility, and you can choose how long the funds will be fixed for.
What is the best thing to do with a lump sum of money? ›
Saving with a savings account
If your lump sum is a smaller amount or you would prefer to save your money towards certain priorities, a simple savings account might be the better option for you. Cash savings are always popular with people who want to put away a lump sum and earn interest over a long period of time.
What percentage of American retirees have a million dollars? ›
In fact, statistically, around 10% of retirees have $1 million or more in savings. The majority of retirees, however, have far less saved.
The 4% Rule
For an income of $80,000, you would need a retirement nest egg of about $2 million ($80,000 /0.04).
How much money do you need to retire with $100000 a year income? ›
This means that if you make $100,000 shortly before retirement, you can start to plan using the ballpark expectation that you'll need about $75,000 a year to live on in retirement. You'll likely need less income in retirement than during your working years because: Most people spend less in retirement.
