When saving for retirement in a Defined Contribution pension scheme there are a number of choices that an employee and their employer will make. These choices can have an impact on the final income received in retirement by the employee. Employee choices include: increasing employee contributions; whether to opt out of pension provision; when to retire; how much of the pension fund to convert into an income and which retirement income product to use to convert a pension fund into an income in retirement. Other factors include employer choices regarding the level of employer contributions and the level of charges of the pension scheme.
The research shows the impact of certain specific choices and factors for a median earning man and woman, and their potential to either reduce or enhance private pension incomes. The modelling shows that making sacrifices earlier on in life such as increasing contributions into a pension, or later on in life by working and saving for longer, or annuitising some or all of the 25% tax free lump sum, can significantly enhance your pension
The research also demonstrates the adverse impact of an individual being a member of a pension scheme with higher charges, or from an individual not ‘shopping around’ for the best annuity rate available on the market. These are choices and factors that, if changed, could increase individual’s private pension income. However, they rely on the employer securing access to a lower charging scheme, which may not be possible especially for smaller schemes, or on an individual shopping around at retirement to find an annuity on the market offering a better rate.