Why regular pension reviews matter

For many people, pensions sit quietly in the background of their financial lives. You join an employer’s pension scheme, set up a PRSA or perhaps make a pension contribution when completing your annual tax return. After that, it can be tempting to assume that the job is done and simply leave the pension to look after itself until retirement.

But a pension is far too important for that.

Your pension may ultimately become one of your largest financial assets and will play a central role in determining the lifestyle you can enjoy after you stop working. That is why it deserves to be reviewed regularly, just like any other important part of your financial plan. A good pension review is not simply about looking at how your investments have performed over the previous 12 months. It is about asking a much more important question:

Are you still on track to achieve the retirement you want?

Your circumstances change

A pension strategy that was appropriate five or ten years ago may not necessarily be appropriate today. Perhaps your salary has increased. You may have changed jobs, become self-employed, started a business, married, had children or paid down a significant portion of your mortgage. Your retirement ambitions may have changed too.

As your financial circumstances improve, there may be an opportunity to increase your pension contributions without having a dramatic impact on your current lifestyle. Alternatively, if you have accumulated several pension funds from previous employments, a review can help you understand exactly what you own, where it is invested and how those benefits fit together as part of your overall retirement strategy.

The important point is that your pension should evolve as your life evolves.

Are you saving enough?

This is one of the most important questions a pension review should answer. It can be easy to focus on the current value of a pension fund and feel reassured by a seemingly large number. However, what really matters is the income that fund might ultimately generate in retirement.

And retirement can last a very long time. Increasing life expectancy is very good news, but it also creates a financial challenge. People retiring today may need their accumulated savings to support them for 20, 30 or potentially even 35 years.

That makes it important to think beyond simply accumulating “a pension pot”.

What level of income would you like in retirement? What will your likely expenditure look like? Will your mortgage be cleared? Do you hope to travel regularly? Will you want to help children or grandchildren financially?

Once you establish what your desired retirement might cost, you can work backwards to determine whether your current pension funding is likely to be enough. If there is a shortfall, identifying it at 40 or 50 is considerably more useful than discovering it at 64.

Time can be your greatest advantage

One of the strongest arguments for reviewing your pension regularly is that relatively small changes made early can have a substantial long-term impact. Money invested in a pension has the opportunity not only to generate investment returns, but also potentially to generate returns on those previous returns over time.

This is the power of compounding, which underlines why time is an enormously valuable ingredient in retirement planning. Waiting until retirement is approaching before increasing pension contributions means you have fewer years in which to build the required fund.

Starting earlier gives you more options.

Is your pension invested appropriately?

Your contribution level is only half the story. You should also understand where your pension money is invested. Someone with 25 years until retirement may have a very different capacity to accept investment risk than someone planning to retire within the next three years.

Your attitude towards risk, financial circumstances, other assets, retirement plans and ability to absorb market falls should all be considered. A regular pension review allows you to examine whether your investment strategy remains appropriate, rather than simply remaining in the same fund because that is where your pension was invested many years ago.

It also provides an opportunity to examine investment performance, charges, diversification and whether the level of risk being taken is consistent with your objectives.

Don’t overlook the tax advantages

Tax relief remains one of the major attractions of pension funding. Depending on your circumstances and subject to the relevant Revenue limits and rules, pension contributions usually qualify for income tax relief. For someone paying income tax at the higher rate, this can significantly reduce the effective personal cost of making a contribution.

But tax relief should not be the only reason to contribute. The real objective is to turn money earned today into financial independence in the future. Tax relief simply makes the journey more efficient.

The State Pension may not provide the lifestyle you want

For many people, the State Pension will remain an important component of retirement income. But there is an important distinction between having enough income to cover the basics and having sufficient income to maintain the lifestyle you enjoyed while working.

Your own pension savings provide the opportunity to bridge that gap.

As the population ages and people spend longer in retirement, the importance of building your own retirement resources becomes even greater. It is prudent to assume that relying entirely on the State is unlikely to provide the retirement lifestyle many people aspire to.

Consider it a financial check-up for your future self

A pension review does not necessarily mean that something has to change every year. Sometimes the most valuable outcome is confirmation that your contributions, investment strategy and retirement projections remain broadly on track. At other times, the review may highlight an opportunity to increase contributions, change an investment strategy, consolidate older pension arrangements or make better use of available tax relief.

Most importantly, it ensures that retirement planning remains an active part of your overall financial plan rather than something you only think about in the final few years of your career.

Your retirement could represent a quarter or even a third of your adult life. It is worth taking the time, every now and again, to make sure you are financially preparing for it.