Your workplace pension could eventually become one of the biggest financial assets you own. But do you know what it is invested in, what fund you are in, or what that fund is actually trying to achieve?
I'm currently helping a Peterborough company move its workplace pension scheme from The People's Pension to Royal London.
And going through that process has reminded me of something I see all the time.
People can work somewhere for five, ten or twenty years, pay into their workplace pension every single month and still have absolutely no idea what is happening to the money.
They know it comes out of their wages.
They know their employer probably puts something in as well.
They occasionally receive an email containing the word pension, which they enthusiastically file in the folder marked "I'll look at that later."
And that can be about the extent of the relationship.
The problem is, your workplace pension could eventually become one of the biggest financial assets you own.
It probably deserves slightly more attention than the Netflix subscription you spent 25 minutes cancelling last month.
A workplace pension isn't just another deduction from your wages
It is very easy to look at a payslip and see the pension contribution alongside tax, National Insurance and everything else that has disappeared before your salary reaches the bank.
That makes it feel like another expense.
But it isn't quite the same thing.
With a defined contribution workplace pension, money is being directed towards your future retirement. Depending on the scheme, that can include contributions from you and your employer, with pension tax advantages applying under the relevant rules.
If you want to start right at the beginning, our guide to what a workplace pension is and how it works explains the basics in plain English.
But once the money arrives in the pension, there is another question that is probably even more important.
What actually happens to it?
Your pension probably isn't sitting in a savings account
This catches quite a few people out.
If you have £50,000 in a defined contribution workplace pension, there probably isn't a little bank vault somewhere containing £50,000 with your name written on it.
The money will normally be invested.
Usually that means your pension owns units in one or more investment funds.
Those funds might then invest across things such as:
- company shares
- government and corporate bonds
- cash
- property-related investments
- and potentially other assets
The exact mixture varies enormously between pension funds.
And that mixture matters because it influences how much the pension might grow, how much the value can move around and the level and type of investment risk being taken.
Our Knowledge Hub goes into this in more detail in Where Is My Workplace Pension Invested?
The important bit for now is this:
The pension is the wrapper. The investments are what sit inside it.
People will often tell me:
"My pension is with Royal London."
Or:
"Mine's with Legal & General."
Or Aviva. Scottish Widows. The People's Pension. Whoever it happens to be.
That tells me who provides the pension.
It doesn't necessarily tell me what the pension owns.
It's a bit like saying:
"My shopping is from Tesco."
Lovely.
What did you actually buy?
You may be in a fund you never personally chose
For many workplace pension members, contributions go into the scheme's default investment fund.
That sounds slightly alarming if you have never heard the phrase before.
It shouldn't.
A default pension fund exists because expecting every new employee to become an investment expert on the same day they are learning where the toilets are and trying to remember everybody's name would be slightly ambitious.
The default allows pension contributions to be invested even where the member hasn't actively selected a different fund.
And a well-designed default fund can provide diversification and professional investment management.
So default does not mean bad.
It also doesn't mean guaranteed.
And it doesn't mean personally designed for you.
A default fund is normally created to work for a broad group of pension members rather than being built around your individual retirement plans, other assets or attitude to investment risk.
You can read more about this in What Is a Default Pension Fund?
One thing people often miss: your pension may change its investments over time
Some workplace pension funds use what is often called lifestyling or a target-date approach.
In simple terms, the investments may change as the retirement date held on the pension gets closer.
When retirement is decades away, the fund might have greater exposure to assets such as company shares, aiming for long-term growth.
Later, the investment mix may gradually change.
That can make perfect sense.
But there is one fairly obvious catch.
What retirement date does your pension think you're working towards?
If the provider has you retiring at 65 but you are planning to finish at 60 — or work until 70 — the investment strategy could potentially be following a timetable that doesn't match yours.
That doesn't automatically mean something needs changing.
It means it is worth understanding.
Which is really the point of this entire article.
Risk doesn't simply mean "can my pension go down?"
If your workplace pension is invested, its value can fall as well as rise.
That is investment risk.
But it isn't the only risk.
Somebody with decades until retirement might understandably dislike seeing the value of their pension fall.
Nobody logs into a pension app, sees £8,000 disappear and thinks:
"Lovely. Exactly what I was hoping for this morning."
But moving everything towards assets that fluctuate less doesn't magically remove every financial risk.
There can also be a risk that money grows too slowly to keep pace with inflation or fails to grow sufficiently to support the retirement somebody wants.
So the useful question isn't:
"Can my pension fall?"
It probably can.
The better question is:
"Do I understand what it is invested in, why it is invested that way and what job those investments are supposed to do?"
So, when did you last actually look?
Not just at the balance.
At the pension.
Log into your workplace pension account and see whether you can answer a few basic questions.
What is the fund called? Is it mainly invested in shares, bonds, cash or a mixture? What level of investment risk does it take? Is it a default or lifestyle fund? What retirement age does it have recorded for you?
You do not need to become an investment manager.
You do not need to spend Sunday evening studying the Japanese equity allocation of your pension fund while everyone else watches Antiques Roadshow.
You just need to understand the basics of something that may have been quietly building in the background for decades.
Because workplace pensions are incredibly easy to ignore.
Money goes in automatically.
Investments happen automatically.
Statements arrive automatically.
And suddenly twenty years have passed.
Learn more
If this has made you realise that your knowledge of your workplace pension currently extends to "I definitely have one somewhere", start in the Workplace Pension section of the Open Door Wealth Knowledge Hub.
Then take a look at:
Where Is My Workplace Pension Invested?
and
What Is a Default Pension Fund?
The objective isn't to convince you to change anything.
It is to help you understand what you already have.
And if you have several pensions, are approaching retirement or simply want somebody to help you make sense of how everything fits together, Open Door Wealth can help you build the bigger picture.
Sometimes good financial planning starts with a surprisingly simple question:
"What have I actually got?"
Steve Ralph
Financial Adviser