Saving for your retirement should be a big part of your financial plan and can help you to secure the lifestyle you are looking forward to. But keep a look out for these 8 pension mistakes, which can ruin your retirement plans.
1. Putting Off Paying Into Your Pension
The sooner you begin paying into a pension regularly the better.
Throughout your entire career, even small consistent deposits will add up. You will also have much longer to benefit further from the compound interest on those investments. However, it is said that some workers are making cuts or stopping pension contributions altogether. Royal London says that 2 in 5 workers aged between 18 to 34 either stopped or reduced pension contributions due to Covid 19. Unbiased reports almost a 1/4 (24%) of those under 35 have zero pension savings.
That being said, it is never too late to start a pension and plan for your retirement.
2. Paying Only The Minimum Contributions
By paying only the absolute minimum contribution level under your automatic enrolment, is very likely to leave a wide shortfall when you do retire. When you are automatically enrolled, 5% of your pensionable earnings are paid in to your pension.
In spite of this, 37% of workers wrongly believe that the auto-enrolment base pension contribution is the government’s recommended payment to be comfortable in your retirement, according to the Pensions & Lifetime Savings Association.
3. Opting Out Of Your Workplace Pension
The majority of workers today are automatically enrolled into a company workplace pension. Whilst you are able to opt out, this is more often a mistake when you take into consideration the long-term benefits. Pensions are a very tax-efficient way to save for your retirement and by opting out, you are effectively rejecting “free money”.
Your pension contributions actually benefit from tax relief at the highest level of Tax you pay on your income, giving an instant boost to your savings. What’s more, employers must pay in to your pension too. Currently, employers must contribute a minimum of 3% of pensionable earnings for you.
4. Staying With Your Default Pension Fund
Pension providers often offer a number of different funds, each with varying risk profiles. You will begin paying into the default fund, but you can choose to switch. You may want to reduce the risk of the investment fund if you are close to retiring or a greater risk option if you possess other assets you can fall back on. The default fund could be the right choice for you, but you should always review the alternatives.
It is also worth pointing out that many pension providers may start to reduce the investment risk level you take as you approach your assumed retirement date. Make sure the age you intend to retire is correct.
5. Ignoring Pension Performance
Your pension is typically invested and like many other assets, you should keep a track on its performance with a long-term plan. Regularly checking investment performance can help to ensure that you are on track and recognise where gaps could occur. In addition to reviewing investment returns, you really should also review the fees you’re paying to the pension provider. In some instances, switching to a different provider or consolidating pensions can make more financial sense, as well as making your retirement savings much easier to manage.
6. Losing Old Pensions
Many people are automatically enrolled into a workplace pension. If you change jobs, it could mean you lose track of where your retirement savings are kept.
If you’re not regularly receiving pension advice, it’s an asset that can slip your mind. Only 1 in 25 people consider letting their pension provider know when they move home, according to the Association of British Insurers. It is estimated there are 1.5 million unclaimed pensions worth almost £20 billion.
Going through your paperwork can indicate if you have lost a pension. The government has a tracking service which can help if you can’t find the details you need.
7. Thinking That The State Pension Will Be Enough
2 out 3 (64%) people expect the State Pension to adequately fund their retirement, research has found.
The State Pension is indeed a valuable benefit. However, for the majority of people, it just isn’t enough to enjoy the retirement lifestyle they would like. In the 2021/22 tax year, the State Pension will pay £179.60 per week (£9,339.20 per year), under the assumption that you have 35 years of National Insurance contributions or credits. Building up a separate pension pot is often critical for a comfortable retirement.
8. Relying on Inheritance
With battling short and long-term goals, it can be tough to put money aside for retirement when you are still working. For some people, it means an expectant inheritance is the main focus of their retirement plan. However, it means your desired retirement could be at risk due to external factors that are beyond your control.
First, you cannot be sure when you will receive an inheritance. You may need to postpone your retirement as a result. Secondly, even if you have spoken to your loved ones about receiving an inheritance, circumstances can quickly change. A parent’s assets can be swiftly depleted if they need care later in their life, for example. Despite this, nearly 20% of people are predicting an inheritance to support them in their retirement, according to a recent survey from Hargreaves Lansdown.
Planning for retirement is crucial. Please contact a reputable pension adviser to create a retirement plan that suits you, to help you avoid mistakes and secure a retirement lifestyle you can look forward to.