hyhyh

I have a pension with the bank that I used to work for. I was redundant four years ago and have now retired, but the pension has not been touched and is still with the pension provider. I wrote to them to see if I can still add to the pension but I have been told no as it has been deferred. Does that mean it will still grow? What other advice would you give?

As most people live longer than previous generations it makes sense to ensure a secure financial future by knowing your pension inside out

You haven’t mentioned what type of pension that you have but as you have been looking to make further contributions, I assume that you have a defined contribution, or ‘money purchase’ pension. This sees your savings, along with contributions from your employer, invested in a range of assets, such as shares, bonds or property. These contributions are topped up by the government in the form of tax relief, payable at your income tax rate.

Over the years your investments will, hopefully, grow in value, completely free of income tax, dividend tax and capital gains tax. And given that pension saving is done over decades, you can hope to see significant growth in your savings, not only solely from the performance of the markets, but also because of compound interest – meaning that the returns you make are reinvested and your pension receives growth on top of the growth that your investments have made.

When you come to draw from this pension, which can be done from age 55 (increasing to 57 from 2028), you have a number of options. You could withdraw everything out in one go, with the first 25% paid tax-free and the remainder taxed at income tax rates; take out ad-hoc lumps from your savings as you wish, again with the first 25% tax-free and the rest taxed; swap your savings for an annuity, which will pay you a guaranteed income for the rest of your life; or take your tax-free lump sum and move your pensions into a drawdown plan, leaving yoursavings invested and generating an income, all potentially subject to income tax.

When you leave a company (and its pension scheme), your pension savings don’t move with you, unless your new employer is willing to accept a transfer from a different scheme. And it is thought that we could have as many as 11 jobs throughout our career, meaning that there will be millions of people in your situation, with old pensions floating around with former employers.

Once you leave the pension scheme, you become a ‘deferred member’, meaning that you are no longer paying into it but it is not yet being claimed. It is quite typical for pension schemes to refuse to let deferred members make further contributions – they already have the burden of managing the contributions of active scheme members, but letting former staff make contributions has the potential to significantly increase the administrative workload.

While you’re no longer contributing, your pension will remain invested in line with the scheme’s strategy. This is important to note, as it will impact on where your savings are invested and your potential for growth (and losses).

Typically, a workplace scheme will employ a strategy known as ‘lifestyling’, which sees your investments move into less risky assets the closer you get to your retirement age. At the start of your career, all the way up to something like age 45 or 50, you may have the majority of your pension invested in shares – the riskiest asset, but the one with the greatest potential for growth. This is because you want to maximise your contributions while you’re working and you have plenty of time to ride out the volatility of the markets decades before retirement.

However, once you get around 15 years away from retirement, your scheme may begin to move you into less risky assets, such as bonds and cash, gradually, to protect the value of your pension as your retirement age approaches. The downside, of course, is that you will sacrifice some growth to get this protection. So while your pension remains invested, it may be that the growth you’re getting is muted because of the scheme’s investment strategy.

I would suggest taking some financial advice at this stage. It may be sensible to set up a drawdown plan, and invest this pension to generate an income for your retirement, if that’s what you want or need.

Alternatively, you could leave the pension untouched and use it as a way of passing money to your heirs. But speaking to a professional adviser will help you understand your goals and choose the right products.

Gareth Shaw is Head of Which Money