The 12 Biggest Pension Mistakes
Your pension should be your greatest asset as you enter retirement, but if you make a mistake with your pension in the years before you retire you could end up paying for it for life. Here are the twelve most common mistakes investors make with their pension – and what you need to do to avoid making them.
1. Relying on the State for your RetirementPutting off paying into a pension in the hope that the state will pay for your retirement could be a costly misjudgement. It is an astonishing fact, but according to research conducted by the Association of British Insurers more than 40% of workers in the UK are currently saving far too little for retirement. Many are saving nothing at all.
This is worrying, especially when you consider that the current Basic State Pension works out at £95.25 per week for a single person and £152.30 per week for a married couple. Not much is it?
Also unsettling is the fact that there is no guarantee as to what the level of state pension will be when any of us retire in the future. With the UK’s population ageing and greater numbers of pensioner for the government to pay for, chances are that it will be less than you will be expecting or perhaps felt you deserve to live on.
To make matters worse, the Government is planning to increase the national retirement age for both men and women in the next few years, so we will all have to wait longer to draw our state pension. By the year 2024 men and women may have to continue working aged 68 and beyond.
2. Too Little, Too LateWhen you are young, the idea of starting payments into a personal pension sounds as exciting as tidying your sock drawer. But the earlier you start making contributions to your pension, no matter how small, the better.
That is because a small amount invested in a pension each month, say in your 20s, is worth a lot more than the same amount invested during your 50s, as your money will benefit from years of growth and compound interest rolled up into your pension pot year after year.
As a general rule, most savers should try to put between 12% and 15% of their salary into their pension. If you start saving in your 20s you can lower this to between 8% and 10%. If you wait until your 50s you’ll need to set aside between 30% and 40% of your salary to give yourself a decent standard of living in retirement.
Starting as early as you can will give you the best chance of accumulating a sizeable pension pot by the time you retire.
3. Missing out on Employers’ ContributionsMost companies now recognise the need to make contributions to their employee’s pensions – especially since the days of generous final salary schemes are well and truly behind us.
However, some companies will only make contributions to pensions if the employee also pays in the same amount.
Make sure that you don’t miss out on this arrangement and try to pay in as much as you can reasonably afford. If you don’t, not only are you missing out on ‘free money’ you are also going to lose out on valuable tax relief on your contributions, which will make your pension pot go considerably further than it would without employer contributions.
4. Choosing the Simplest OptionWhether you are paying into a company pension or a personal pension, you will be asked to make a choice as to which type of fund you wish to invest in. This is an important decision and shouldn’t be taken too quickly.
Most employees pay their pension into the company’s ‘default’ or ‘plain vanilla’ fund offering. By their very nature, these funds may not be the best performers available or the right funds to suit your risk profile.
For example, if you are in your 20s or 30s you might be willing to take on greater risk with your money, based on the view that over time your fund will grow more quickly. If you are in your 40s or 50s you may want to adopt a more conservative approach and invest in low risk assets that provide higher levels of income. If you are still confused, don’t be afraid of talking about your options with a financial adviser.
5. Not Reviewing your PensionIt’s all too easy to forget all about your pension and expect it to continue to grow over the years. But you wouldn’t forget to check your bank balance or your utility bills would you? It brings peace of mind to check once in a while that you have as much money in the bank as you thought you had, or that your gas bill hasn’t suddenly doubled.
If you don’t monitor your pension, at least on an annual basis, then you will not be able to notice any discrepancies in your contributions or spot poor performance from your pension fund.
6. Not Increasing your ContributionsMost of us will find that as our career progresses our salary will increase too. But it is easy to use this money to ‘upgrade’ your lifestyle and spend more on the luxuries that you’ve worked so hard for. Sadly this often leaves little room for your pension.
You should review your pension contributions on a regular basis and certainly after you have received a pay rise or bonus. If you keep your pension contributions at the same level, over time your pension will fall behind your standard of living and you could receive a nasty shock when you retire and find you have far less to live on.
7. Stopping your Pension ContributionsStockmarkets can be volatile and many investors who checked their pension statements earlier in the year will have gotten a nasty surprise. However, even if your pension pot is not growing as you had anticipated, this shouldn’t encourage you to stop making contributions.
In fact, many advisers tell their clients to increase their pension payments during periods of market volatility, as they can benefit from investing at depressed market values and hopefully pick up some bargains.
8. Missing out during a DivorcePensions will often be the last thing thought about when a couple goes through a divorce. But for women, it is important to realise that their husband’s pension is considered an asset. If the marriage is dissolved the wife could be entitled to a portion of the husband’s pension. This could prove extremely valuable if the wife has given up their job to have children and have a reduced pension of their own as a result.
9. Not De-Risking your PensionThe stockmarket falls seen earlier this year proved disastrous for many investors on the verge of retiring. Many investors who did not ‘de-risk’ their portfolio before the value of equities started plummeting would have seen their pension pot shrink considerably. This could have been avoided.
As you get older your pension should be more risk-averse. Most people should start thinking about moving away from more risky assets such as equities and into more conservative assets such as government bonds and cash. Doing this will offer you a greater degree of protection should equities take another untimely hit.
10. Not Getting a State Pension ForecastIf you don’t know the value of your state pension before you retire you are putting yourself at risk of retiring into poverty.
A forecast will provide you with an estimate of your basic state pension and also the State Second Pension (which used to be known as SERPS).You can obtain a State Pension forecast by visiting www.gov.uk.
11. Not Shopping Around for an AnnuityWhen you approach retirement, your pension provider will contact you to discuss your annuity. This will pay you an income taken from your pension pot for the rest of your life.
Most people take up the annuity offer from their pension provider, without exploring any other annuity options. Before making a decision it is well worth discovering whether your pension could purchase a better annuity with a bigger payout on the open market. Many pensioners have managed to obtain an annuity some 40% - 50% higher by going down the ‘open market option’.