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8 pension mistakes that could affect your retirement

News Retirement planning

Saving for retirement should be part of your financial plan and can help you secure the lifestyle you’re looking forward to. But watch out for these eight pension mistakes, which could ruin your plans.

1. Putting off paying into a pension

The sooner you start paying into a pension regularly, the better.

Throughout your career, even small regular deposits can add up. You will also have longer to benefit from the compounding effect of investments. However, some workers are cutting back or stopping pension contributions. According to Royal London, two in five workers aged between 18 and 34 stopped or reduced pension contributions due to Covid-19. Unbiased reports almost a quarter (24%) of under 35s have no pension savings at all.

That being said, it’s never too late to start a pension and plan for retirement.

2. Opting out of a workplace pension

The majority of workers are nowadays automatically enrolled into a workplace pension. While you can opt out, this would often be a mistake when you consider the long-term benefits. Pensions are a tax-efficient way to save for retirement, and by opting out you are effectively giving up “free money”.

Pension contributions benefit from tax relief at the highest level of Income Tax you pay, providing an instant boost to savings. On top of this, employers must contribute to your pension too. Currently, employers must pay a minimum of 3% of pensionable earnings on your behalf.

3. Making only the minimum contribution

Linked to the above point, paying only the minimum contribution level under automatic enrolment is likely to leave a shortfall when you retire. When you’re automatically enrolled, 5% of your pensionable earnings go to your pension.

Despite this, 37% wrongly believe the auto-enrolment minimum pension contribution is the government’s recommended amount to be comfortable in retirement, according to the Pensions and Lifetime Savings Association.

4. Sticking with a default pension fund

Pension providers typically offer several different funds, with various risk profiles. You’ll begin paying into a default fund, but you can switch. You may want a lower risk investment fund if you’re close to retiring or a higher risk option if you have other assets you can rely on. The default fund may be the right option for you, but you should review the alternatives.

It’s also worth noting that many pension providers will start to reduce the level of investment risk you take as you near an assumed retirement date. Make sure the age you plan to retire is accurate.

5. Not checking pension performance

Your pension is usually invested and like other assets, you should track its performance with a long-term outlook. Regularly checking investment performance can help ensure you’re on track and identify where gaps may occur. In addition to reviewing investment returns, you should also review the charges you’re paying to the pension provider. In some cases, switching provider or consolidating pensions can make financial sense, as well as making your retirement savings easier to manage.

6. Losing track of old pensions

Most people will be automatically enrolled into a workplace pension. If you switch jobs, it can mean you lose track of where your retirement savings are.

If you’re not regularly checking your pension, it’s an asset that can slip your mind. Just 1 in 25 people consider telling their pension provider when they move home, according to the Association of British Insurers. It’s estimated there are 1.6 million unclaimed pensions worth £19.4 billion.

Going through your paperwork can highlight if you’ve “lost” a pension. The government’s tracking service can help if you can’t find the details you need.

7. Assuming State Pension will be enough

Almost two-thirds (64%) of people expect the State Pension to fund their retirement, research from accountants Kreston Reeves found.

The State Pension is a valuable benefit. However, for most people, it is not enough to enjoy the retirement lifestyle they want. For the 2021/22 tax year, the State Pension will pay £179.60 per week (£9,339.20 per year), assuming you have 35 years of National Insurance contributions or credits. Building up a separate pension provision is often essential for a comfortable retirement.

8. Relying on an inheritance

With conflicting short and long-term goals, it can be difficult to set money aside for retirement when you’re still working. For some, it means an expectant inheritance is the focus of their retirement plan. However, it means your retirement could be at risk due to factors that are beyond your control.

First, you can’t be sure when you’d receive an inheritance. You may need to delay your retirement as a result. Second, even if you’ve spoken to loved ones about receiving an inheritance, circumstances can change. A parent’s assets can be quickly depleted if they need care later in life, for example. Despite this, nearly one in five people are anticipating an inheritance to support them in retirement, according to a survey from Hargreaves Lansdown.

Planning for retirement is important. Please contact us to create a retirement plan that suits you, we’re here to help you avoid mistakes and secure a retirement lifestyle you can look forward to.

Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.

A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available.

Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.

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