How to compare pensions
We’re constantly told that our retirement savings should be working as hard as possible for us, but how do you go about finding the right pension to help you achieve this?
Comparing pensions isn't easy. It’s something that we at Profile Pensions do every single day, but the level of complexity involved is quite high. So much so, we’ve got a dedicated panel of experts which regularly reviews the market and compares all the different pensions out there, so we can be certain we’re recommending the best possible plans to our customers. You can find out more about how our investment committee works here.
When reviewing any pension, there are two main elements you should compare, and that's the pension plan itself but then also the fund that you invest in. Here are some of the things you’ll need to consider.
The financial stability of the pension provider
We’ve all heard horror stories about pension schemes and companies going bust, so it’s vital to check how financially secure your pension provider is.
One of the best ways to do this is to look at how the company is rated by independent credit rating agencies such as Standard & Poor’s. These look at how well a company would be able to cope based on a variety of different economic conditions. Companies which it believes are the most financially stable receive the highest AAA ratings, whilst those which are considered vulnerable receive a B or CCC rating.
Fees and charges
Steep charges can really eat into your investment returns, so it’s important to make sure you’re not paying over the odds. Ideally, annual charges should be below 0.5%.
You’ll also need to check for hidden costs such as dealing charges, which can add up if you make regular transactions. If you’re not sure how much you’re paying, you can usually find these on your annual pension statement. Read more about fees in our check your charges blog.
Pension freedoms introduced a few years ago mean there’s a wide range of options available when it comes to taking an income from your pension. These include drawdown, which involves leaving your retirement savings invested and taking an income as and when you need it, and annuities, whereby, in return for handing over some or all of your pension pot, you receive a guaranteed income for life.
Having the option of both of these is important, but even if your provider does offer both, you should still shop around at retirement to make sure you’ve got the best possible deal. Annuity rates, for example, can vary widely depending on which provider you go to.
You should also find out whether your provider offers the ability to withdraw tax-free cash from the age of 55 if this is something you would like to do, as not all will allow you to do this.
Find out more about your options at retirement in our blog on Accessing your pension.
Range of funds
When comparing pensions, check to see which funds different providers are offering. Some offer a relatively limited range of funds, whereas other may provide a much broader selection.
It’s important to have a wide choice of funds available so that you can choose those which match your attitude to risk, and which have competitive charges. If you’re not sure where to invest your retirement savings, seek professional pension advice.
Learn more about the funds your retirement savings are invested in in our blog Where is my pension invested?
Quality of funds
It’s not just the range of funds available which matters. It’s also important that these funds provide the best possible chance of growing your pension.
There are various ways to check the quality of a fund. For example, Crown Ratings, devised by ratings agency FE (formerly Financial Express) are designed to highlight funds that have performed consistently well relative to their peers. A five FE Crown Rating is the highest rating and one the lowest, so funds rated three or above are generally considered pretty good.
5 Crowns = Top 10%
4 Crowns = Next 15%
3 Crowns = Second quartiles
2 Crowns = Third quartile
1 Crown = Fourth quartile
You may also want to look at one, three and 10 year performance figures for any fund you’re considering investing in. However, it’s important to remember that however well a fund has done in the past, there are no guarantees that it will continue to do well in future.
Another indicator of the quality of a fund is how big it is. Fairly well-established funds should have over £1billion in assets under management. Again, if you’re not sure which funds are right for you, get help from an expert.
Level of risk
When choosing a fund for your retirement savings, it’s important to consider how much risk you’re comfortable taking.
For example, is your approach more cautious and you’d prefer a lower risk fund, or are you happy to accept a higher level of risk in the hope that you’ll achieve potentially higher returns?
Often pension providers show a ‘risk score’ alongside the funds they offer which can give you a guide as to how risky each fund is. You can also get an idea of how risky a fund is by looking at what proportion is invested in shares, which are at the top end of the risk spectrum, and what proportion is invested in lower risk investments such as bonds and cash.
Bear in mind that when investing, diversification is vital. This essentially means not putting all your eggs in one basket, so that your money is spread across a wide range of assets, sectors and geographical areas. That way, if any one of these suffers a setback, hopefully your better performing investments will help offset any losses.