Page last updated at 06:26 GMT, Monday, 1 September 2008 07:26 UK

Tips for people in DC pension schemes

Money Talk
By Mark Duke
Towers Perrin

Mark Duke, Towers Perrin
Mark Duke, Towers Perrin

If you have checked out how your pension investment has performed recently you may have had some disappointing news.

The chances are that if your company offers a pension plan, it is very likely these days that it is what is know as a "defined contribution" or D.C. scheme.

This means your employer, and probably you as well, pay into what is in effect a personal investment account.

Like millions of other investors, you may well have seen the value of your pension fall in the past year.

What should you do?

Doing nothing, and hoping for better things, is one strategy, but perhaps not the best.

Panicking and making ill-advised short term decisions is another approach.

Instead, now could be a good time to get a longer term grip on your retirement planning.

Here are some tips about how to make a start.

Find the literature you were given about the plan.

This could be a booklet, information posted on your company's intranet or possibly access to a website run by the people who invest your pension money.

Importantly this will remind you about the basics of how much goes into your plan, whether if you pay more the company will pay extra too and a description of the different investment options.

Also, see if there is a helpline or other advice available (and whether using it will cost you anything). If help is available, use it.

Your choices

Lots of people rely on a default investment option.

See if the literature gives any clues as to what investment profile better fits you

This means that you have not expressed any preferences and the plan, in effect, makes the decision for you.

Now is a good time to remind yourself how this default option works.

When you read the description does it sound like it is based on someone like you?

For example, it is likely to be based on an assumption about when you will need to start taking an income from your pension.

If your profile does not seem to fit the "default" person, see if the literature gives any clues as to what investment profile better fits you.

In general, a person should be taking little risk if an investment is a significant part of their overall wealth and they need to start drawing on that investment sooner rather than later.

Is more better?

How much you save is as important as where you save.

It could be a good time to think about whether you are saving at the right level.

Always look at all your savings together and how they relate to your circumstances.

For example, long term saving in a pension has many advantages, particularly the fact that investment income is untaxed, and your contributions are offset against your taxable income, thus reducing your own tax bill.

But if your big issue is about reducing debt and building up some savings that you could get your hands on quickly, then putting extra in a pension may not make sense.

On the other hand if you can afford it, and your employer will add to your pension, then make the most of the opportunity.

Try and keep things simple.

It can be tempting, particularly with investments, to make decisions that look right now, but need to be kept constantly under review.

Few of us have the time to do this.

Better to make simple choices using simple products that will hopefully look after themselves with infrequent checks needed.


In particular, remember that changes in your personal circumstances are often a time to review what you are doing with your pension assets.

You will want to make sure that as little as possible of your money is disappearing in charges taken by third parties

Job change, divorce or an inheritance are all examples of potentially "pension significant" events.

It is now common for pension plans to provide access to modelling tools that enable you to test the impact of changing how much and where you save.

The best tools will help you assess how much risk you want to take and will enable you to look at all your pension and non-pension investments together.

What you can then do is choose a combination of future pension contribution and investment mix that aims to produce the level of retirement income you need with a level of risk you can afford to take.

Even if you make the best decisions you can, you will want to make sure that as little as possible of your money is disappearing in charges taken by third parties.

Company pension plans can be very efficient from this point of view, but it is worth finding out when your employer or the pension plan trustees last market-tested the way the plan is provided.

Every pound they save is an extra pound that could be going into your pension account.

The opinions expressed are those of the author and are not held by the BBC unless specifically stated. The material is for general information only and does not constitute investment, tax, legal or other form of advice. You should not rely on this information to make (or refrain from making) any decisions. Always obtain independent, professional advice for your own particular situation.

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