Am I allowed to choose the pension scheme my employer pays contributions into? My employer has picked a scheme for me but since joining in 2016 my pension has barely grown in value. I’m 34 and my pension is currently worth around £40,000.

Ahmed from Coventry 

Tom Selby, AJ Bell Head of Retirement Policy, says:

Auto-enrolled employees contribute a minimum of 4% of ‘qualifying earnings’ to their pension, with the employer contributing a further 3% and another 1% coming via basic-rate pension tax relief. In 2023/24, qualifying earnings are between £6,240 and £50,270. Lots of employers will offer more generous matched contributions than this, however.

Under auto-enrolment, it is your employer who chooses the pension scheme, rather than you. Some companies might offer an alternative to your main auto-enrolment scheme, such as a SIPP (self-invested personal pension), but they are under no obligation to do this.

If you do nothing, your pension contributions will be invested in an auto-enrolment default fund within the pension scheme chosen by your employer. This is simply an investment fund that is designed to be broadly appropriate for all members of the pension scheme. As such, it will not be tailored to your personal circumstances, age or risk appetite.

This default fund is subject to a charge cap of 0.75%. This charge cap was introduced to ensure savers who have little power over the scheme into which auto-enrolment contributions are paid, are protected from high charges. Even relatively small differences in percentage charges can have a big impact on your retirement, particularly over the course of decades.

Some auto-enrolment pension providers will offer alternatives to this default but again they are under no obligation. Often, schemes will just offer a small selection of their own in-house investments.

CAN I CHOOSE WHERE AUTOMATIC ENROLMENT CONTRIBUTIONS GO?

While some firms may offer you a bit of choice over your auto-enrolment investments, they don’t have to. Often you will just have the default investment charge-capped investment and possibly a limited range of the provider’s own funds.

Anthony Browne, the Member of Parliament for South Cambridgeshire, recently put forward the idea of giving employees the right to choose their own pension for auto-enrolment in the House of Commons. This idea has received some industry backing but has not yet been taken up by the Government.

It is, however, possible to transfer your existing auto-enrolment pension to an alternative provider. There are several potential benefits to doing this, including increased choice, greater flexibility when you come to taking a retirement income, and in some cases lower costs and charges. When it comes to investing, having a choice of investments can allow you to build a retirement strategy which better suits your personal preferences.

Before making the leap, you need to be clear of the risks as well. If you transfer your auto-enrolment pension, you will be leaving an environment protected by a 0.75% charge cap and moving your money into a world without a charge cap.

It is perfectly possible to build a suitable, well-diversified retirement strategy for much less than 0.75% in a SIPP, but you need to be careful not to end up paying over the odds. Remember that investing is a long-term game, so you need to be comfortable with the risks you are taking and be prepared to ride out any short-term bumps in the road.

You also need to make sure you are transferring to a bona fide, FCA-regulated scheme that you trust. Although most scams are now outside of pensions, it is still vital to be sure your money isn’t at risk of falling into the wrong hands.

In addition, it’s worth checking you won’t lose any valuable guarantees or expose yourself to high exit charges by transferring your pension. This is more likely to be the case where someone has an older-style pension, as more modern schemes – including those used for auto-enrolment – don’t tend to have these features.

Automatic enrolment

Automatic enrolment reforms introduced in the UK between 2012 and 2018 require employers of all sizes to offer workers who meet certain criteria a workplace pension scheme. To qualify for auto-enrolment you need to be:

– Aged 22 to state pension age (currently 66)

– Working in the UK

– Earning at least £10,000 per year

DO YOU HAVE A QUESTION ON RETIREMENT ISSUES?

Send an email to asktom@sharesmagazine.co.uk with the words ‘Retirement question’ in the subject line. We’ll do our best to respond in a future edition of Shares.

Please note, we only provide information and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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