Decisions, Decisions!

Hello Royal Mail, one and all. 2020 has been a year no one could have predicted but we can now reflect on what a challenge it’s been. At the start of the year the RMDCP funds suffered when the news of coronavirus broke. However, for those of you closer to retirement, the Lifecycle strategy (which you’ll be in unless you actively ‘self-selected’ your funds) is more stable for when you get ready to take your funds. But, by the end of the year, markets bounced back as governments wrote blank cheques to keep their economy alive.

During these difficult times you may have thought about what your pension is worth, how much you pay in, and can you save any money. In this article we discuss the main choices available within RMDCP. The Trustees provide a strategy for people who don’t want to make a choice or are happy the experts choose for them – this strategy is called ‘the Default’. It’s an ironically negative name for something that provides so many positives.

You’ll be pleased to learn that with RMDCP, you can choose what Tier you’re in (meaning what contributions you and Royal Mail pay into your pension pot)!

After 12 months with Royal Mail, you’ll be saving 16% into your pension pot – you’ll pay in 6% of your pensionable pay and Royal Mail will pay in 10%. And, your pay will only be reduced by 4.8% because the Government chips in the extra 1.2% (if you’re eligible for income tax relief at the standard rate). This is called Tier 3 but there are other Tiers available if you want to pay in less. But please remember, Tier 3 was chosen as the Default because the Trustees believe that this rate will help you towards a comfortable retirement and, if you pay less you get less from Royal Mail.

You can choose Tier 2, where you’ll pay in 5% and Royal Mail will pay in 9%. (And it’ll only reduce your take-home pay by 4% because the Government chips in the extra 1% if you’re eligible for income tax relief at standard rate), Or you can choose Tier 1 where you pay in 4% of your pensionable pay and Royal Mail will pay in 8%. (And it’ll only reduce your take-home pay by 3.2%, again because of the tax relief).

So, it’s good to know that in hard times there is the option to save less without having to ‘opt out’ – because you would miss out on the Royal Mail contributions totally. However, if you can afford it, it seems sensible to continue to save at the highest rate because 10% is added to your pot by Royal Mail - if your pay is £25,000 a year, Royal Mail will pay £2,500 a year into your pension pot, tax free. There aren’t many saving schemes where £3 grows into £10 straight away legally!

Another choice you can make for contributions is to pay more in, called AVCs. If you can afford it – and if you have had periods when you haven’t been contributing to a pension scheme – you might wish to pay AVCs. Royal Mail won’t pay in any extra, but you still get tax relief from the Government on those additional voluntary contributions too!

One of the Trustees’ other ‘defaults’ is the RMDCP retirement age. If you haven’t selected your own retirement age, it is age 65 (which resets to age 75 if you’re aged over 65). For many reasons, that might be either too early or too late for you. If it is wrong and you don’t change it, the main negative is that it feeds in to your investment strategy – it determines the period over which Scottish Widows gradually move your pot from funds which offer the potential for high growth, but might fall significantly in value in the short term, into funds where the price is much more stable. If you retire before your retirement age, your investment strategy might have been too risky. That’s fine if markets are going up, but not if markets are going down. And if you retire later than the system thinks you will, you could have missed out on investment growth as you’ll be in investments which aim to be more stable in value.

And that brings me to the last default for people who don’t want to make a choice, the Default investment strategy. This is called a Lifestyle strategy and its designed to give you growth when you have lots of time by investing in risky assets, diversifying risk when you move into middle age, then moving to lower risk as you approach retirement (but trying to keep up with inflation). But you can decide to self-select your investments if you wish to. I would suggest that you should have a good understanding of investment strategies and markets before you make your own investment decisions and think about your other choices listed above first. I will be talking about investments soon in a different article.

When you are considering your retirement savings and the choices available to you within RMDCP, here are some things to think about that should help with the bigger picture:

• The amount of money that you might need in later life (please refer to the Retirement Living Standards website),
• What State Pension you are on target to get (you can find this on the Plan Retirement Income pages of the gov.uk website),
• What you might receive from the RMDCP and other pension schemes that you have been a member of (please refer to your most recent benefit statements).

To make changes on any of the topics here, such as how much gets paid in, you can complete a Choices Form. To change your retirement age or your investments you can complete a Changes Form.

In this blog I’ve highlighted the main choices that you have regarding your retirement savings. These are the levers that you can pull that can make a big difference to what your retirement might look like. Being in a scheme like RMDCP offers fantastic value for what you put in. And if you don’t know what is right for you, there is a strategy in place so that it is all done for you.

I hope you have enjoyed this blog and found it helpful. Do please send me a message on the ‘Get in touch’ page to let me know what you think and what else you would like me to write about.

Wishing you all the very best, Ben