10 biggest pension mistakes to avoid
When it comes to costly pension mistakes, we’ve seen it all.
Many people are taking pension planning into their own hands and while this isn’t necessarily a bad thing, it could impact the long-term health of your nest egg.
Here are the biggest pension mistakes to avoid.
Accepting a default workplace pension
When you put money into a workplace pension, it will automatically be invested in a default scheme chosen by your employer.
Default schemes make it easy for people to start saving, even if they have little understanding of pensions and investments. The potential downside is that the money may be invested in cautious assets such as bonds. It may also be created in line with a retirement date that you’d like to change later, which could make it less effective.
If you want to make the most of your retirement savings your money may work harder under an alternative that offers you more choice on what you’d like to invest in, how much risk you’d like to take, and when you’d like to retire.
2. Avoiding risk when you’re young
According to a survey by Interactive Investor, 66% of 18-39-year-olds had a low-risk or medium-risk pension and just 19% had a high-risk pension.
Many savers could be missing out on opportunities for growth by playing it too safe.
If you’re in your 20s, 30s or 40s and you don’t plan on retiring for another 20 years or more, you can probably afford to take on more risk than you think. You can dial it back a bit in later life when you’re getting closer to your retirement age.
3. Assuming tax-free cash at 55 is a no-brainer
Some people take 25% of their pension as a tax-free lump sum at the age of 55.
It can be a smart move for those who are likely to exceed the lifetime allowance, but many others may be better off taking a different route.
If you have savings or you have other sources of income, it could be wise to leave your pension alone. That way, you’ll give it more time to grow.
There may be tax advantages too. For example, if you pass away and have money left in ISAs, this may be subject to inheritance tax. Pensions, however, don’t form part of your estate in the same way.
4. Forgetting to resume pension contributions after a break
With the cost of living on the rise, many people will be pausing their pension contributions until they’re in a more comfortable position financially.
While this has obvious benefits in the short term, forgetting to resume your contributions could have a significant long-term impact on your pension pot as a whole. [FL1]
5. Wasting an employer match
While some employers will only pay the bare minimum into their employees’ pensions, others will match your contributions up to a certain percentage.
If you have access to one of these generous pension schemes, get as much ‘free’ money as you can. If your employer will match your contributions up to 8%, for example, you’ll need to contribute at least 8% yourself to make the most of it.
6. Thinking inheritance will cover it
If you have relatives with a large estate and you’re fairly confident you’re included in the Will, you might think to yourself: “I don’t need a big pension. I’ll live off my inheritance!”
Assuming you’re getting an inheritance is like walking into a casino and putting everything you own on black. It might happen, but what if it doesn’t? Then you’re spending your retirement with nothing.
Your relationship with your loved ones might change, they might not have as much as you think, or they may need to use the money to pay for care in later life. Think of inheritance as a possibility, rather than a guarantee.
7. Relying on your home
A study by Hargreaves Lansdown suggested that one in five people plan to downsize in retirement, using the money made from the sale of their home to make up for pension shortcomings.
It’s true that you might not need a large family home in your later years, but you’ll still need to live somewhere. Selling your home to buy a smaller one won’t always be cost effective.
In our blog post ‘your property is not your pension’ we talk about a client who made the mistake of thinking they could downsize their way to retirement.
We pointed out that once we added the cost of stamp duty, solicitor’s fees, estate agent’s fees and removal fees to the cost of their new home, the amount left over from the sale of their first home wasn’t all that impressive.
In fact, they’d be left with a nest egg of just £133,750 - or just £445 a month in income.
8. Cashing in your full pension
Many people who manage their own pensions and avoid seeking financial advice end up with a higher tax bill.
For some people, this may be because they cashed their pension in full. The first 25% will be tax-free, but after that it’s taxed as income. So if you take it out in large amounts, you may find yourself in a higher income tax bracket.
9. Underestimating how long you’ll live
If you know someone who worked hard their whole life only to pass away tragically at the age of 60, you might be reluctant to save too much for the future.
It’s only natural to worry about saving for retirement and dying, but the thought of not saving for retirement and living should scare you too.
The current life expectancy in the UK is 81.65. If you retire at 60, can you afford to support yourself for another 20 years?
10. Neglecting National Insurance contributions
You need 10 years of National Insurance contributions to qualify for any kind of state pension.
To get the full amount, you’ll need 35 years of contributions.
If you’ve ever been unemployed, self-employed, or a stay-at-home parent, you may have gaps in your National Insurance record and this could cost you later in life.
Thankfully, it’s often possible to plug gaps from past years by making voluntary contributions via gov.uk.
In summary…
Preparing for retirement can be a challenge. For starters, it can be difficult to save money throughout your working life when you have so many other expenses to consider.
Then, when the time comes to decide what to do with your pension, you can become overwhelmed with rules, regulations, and jargon.
If you’d like help navigating the world of pensions and retirement planning, get in touch with us today. We’ll help you weigh up your options and choose the most suitable route for you.