Seven Easy Mistakes to Make with your Pension
80 is the new 70, 70 is the new 60 – that’s right, we’re all living longer, healthier lives. And with over 32.9 million people saving through their workplace pension scheme at the end of 2016 – up from 33.5 million in 2015 – it’s great to see that more and more people have at least some form of pension to fund their (potentially very long) retirement.
But it’s a sad reality that thousands of them could face a shortfall on their ideal standard of living during this period of their lives, purely because they’re making one, or more, fundamental pension errors. So to make sure you can enjoy your retirement without financial woes – we’re going to be chatting through 7 easy mistakes you should avoid when it comes to planning your pension.
- Not saving enough
Hopefully, you’ve already started a pension – but are you investing enough of your income into it? Research shows that people in the UK, on average, wish for £24,300 annual income during their retirement – but in 2010, the average male pension had a pension income of only £16,600 a year. Therefore, it’s important to make sure your pension is on track towards your desired income and plan accordingly if it’s not.
Our suggestion is to use the ‘25x pensions’ rule – take your desired annual income and multiply it by 25 to see your approximate pension pot target. It’s only an approximate figure, but a good guiding point nonetheless. To check how far off target you are, take what you’ve saved so far and divide that figure by 25 – you’ll see your approximate retirement income at its current stage.
Are you putting off saving because you’re anxious about the possibility of needing the cash before you’re 55? Save into an ISA. Although you won’t benefit from income tax being paid into the pot too, your gains will be tax empty and accessible whenever you need them.
It sounds like a dream position to be in for many, but it can end up a costly mistake. The lifetime allowance for pensions is now £1.03m – it may seem far off, but it’s not as unachievable as you might think. Many, particularly those enrolled in a lifelong pension scheme, are in danger of going over the limit.
The danger is that if you pay in too much, you could end up paying a hefty amount of tax. You might want to consider saving in a more tax efficient manner – like using your ISA allowances. However, circumstances differ for everyone, so we’d urge you to get specific, professional advice if you think you could go over your pension limits.
- Not taking risks
Though your pension contributions will have the most significant effect on your pot value, what you choose to put in your pension also has a considerable impact. It’s essential to pick investments you’re comfortable with and have the right level of risk to suit you. Generally, the higher the risk, the higher the potential returns, but the potential losses are also higher.
Once you’ve completed your risk profiling questionnaire and decided what your goals are for your later years, use the 25x pension rule again. If there’s a negative difference in what you want from your investments, you have a few options – save more, work longer, or take more risk. You should have this conversation with a financial planner – the earlier, the better!
- Be aware of scams
If you ever receive a random phone call and someone tells you:
That you can take your pension money before you’re 55
That they have an incredible investment scheme that you should be part of
That they can help you reinvest your pension pot
Then make a note of the name and company and politely hang up. If it’s something you’d like to find out more about, do some research online – if they’re legitimate, you should be able to find their credentials, including details about their regulated status, easily. If it turns out they’re likely scammers, get in touch with Action Fraud on 0300 123 204. Unfortunately, pension scammers are more common than it seems – always be careful.
- Taking your lump sum without planning
People are able to take 25% of their pension pot tax-free when they retire. It’s often used to pay off a mortgage or left in the bank for easy access when they need it.
However, it pays to get some professional advice. While you think your money is safe and sound in the bank, it’s probably going down in value. With base interest rates at 0.5% and inflation at 2.9%, you could be losing money in real terms.
Considering pension funds are entirely exempt from tax on investment income and gains, it could make sense to keep the money in your pot, growing tax-free for as long as you can if you don’t have a definite plan for your cash.
- Losing track of old pensions
Most people change jobs at least a couple of times from their 20s up until their 60s, meaning it’s not difficult to end up with several small pension pots with different employers. There is currently an estimated £3billion in lost or forgotten pension pots – and though the process of tracing a lost pension can be a nightmare, it’s well worth the time. Head to the Pension Tracing Service, which is completely free and run by the government – they’ll be able to help you, even if you don’t have any contact details or paperwork from the pension provider.
- Not seeking professional advice
This could be the single biggest mistake when it comes to pension planning. Finance isn’t a ‘do-it-yourself’ fare. While some people could be successful in doing so, pensions and long-term savings are too important to make mistakes with.
Recent research found that people who sought advice between 2012 and 2014 ended up with more financial assets and higher pension wealth than individuals in the same circumstances who did it all themselves. Though it may cost you money in the short-term, it’ll make you money in the long-term. If you don’t want to invest in a financial planner, at least make use of Pension Wise, the free government service.
Here at Cowens Financial Architects, we can help you plan your retirement effectively by identifying your personal and financial goals and offering the appropriate solutions to help you achieve your desired lifestyle. Get in touch with us today – we’ll help you take that first step towards financial freedom.