Retirement may still feel like a long way off, but the sooner you get on top of your pension situation the better. The government is increasingly concerned that people aren’t saving enough for retirement, and this means that many of tomorrow’s pensioners could really struggle to make ends meet.
But the news isn’t all gloomy: it’s not too late to get to grips with your pension and start saving your way towards a more comfortable retirement. If you’re making any of these six common pension mistakes, here are some tips for how to fix them.
1. Delaying starting a pension
To give you the best chance of enjoying a decent pension pot at retirement, you need to start saving into a pension plan as soon as possible. The later you start, the bigger the contributions you’ll have to make to get a reasonable retirement income.
What it’s costing you
If you start saving at age 30 and you contribute 15% of a £30,000 salary, you could expect to have a pension fund of £196,100 at retirement. If you made the same contributions but you only started saving at the age of 45, your pension pot would be around £109,500 at retirement.*
How to fix it
Although retirement may feel a long way off right now, it pays to start saving straight away.
2. Opting out of your company scheme
Recent changes to legislation mean that companies must automatically enrol their employees into a workplace pension scheme. As a result, you have to actively opt-out if you don’t want a workplace pension. However, making the decision to opt-out could be costly.
What it’s costing you
Opting out effectively means turning down free money from your employer.
The new Auto-Enrolment rules compel your workplace to contribute towards your pension, as long as you’re paying into the scheme. The employer minimum contribution is currently 2% of your annual salary (rising to 3% in 2019), but many workplaces offer ‘contribution matching’, which means they’ll increase their contributions if you increase yours.
Opting out of your workplace pension effectively means turning down free money from your employer.
How to fix it
If you’ve already opted out, contact HR about signing up.
3. Leaving your pensions languishing
We keep talking about your ‘pension pot’ as a single thing, but many people actually have several pension funds because they’ve moved jobs a few times. It’s easy to push this to the back of your mind, but the fact that your pension isn’t in one place can have a real impact on your retirement savings.
What it’s costing you
Well, the problem is, it’s actually hard to know this until you start tracking down your old pensions and sifting through the paperwork. You may be losing out because you’ve got money sitting in a poorly-performing fund, or because your pension provider is charging high fees.
How to fix it
Start by tracking down those old pensions. We know this can seem like a huge task, but PensionBee can help if you choose to join us. The more information you can give us about them the better as this can really speed your transfer up, but don’t worry if you don’t have your policy number to hand – we don’t necessarily need it and you can always add it later.
4. Thinking property is your pension
It’s tempting to hope that your home or buy-to-let property will tide you over in retirement. This isn’t a good idea for a number of reasons: firstly, it puts all your financial eggs in one basket, meaning you’re at the mercy of the property market, which is often unstable.
Plus, homes are costly because they require constant upkeep and maintenance, and the capital can only be realised when you’re ready to sell.
What it’s costing you
A good pension plan will let you spread your assets across a range of funds, so that your money is invested in a combination of categories like shares, bonds, property and cash. Unlike relying solely on property, this means that your investments are diversified.
If you pay £8,000 into your pension, HMRC adds £2,000 of tax relief.
If you rely on property instead of a pension you’re also missing out on all the extra money that’s added to pension pots. Not only will your employer contribute to workplace schemes, but the government also adds money in the form of tax relief.
For example, if you pay £8,000 into your pension this year, HMRC adds another £2,000 in the form of tax relief, to give you a £10,000 total.
How to fix it
Property can still be a good investment, but make sure you start a pension plan too.
5. Letting fees eat your pension
You probably know that your pension provider charges a management fee, but did you know about the whole host of other fees that they may also be taking from your pension funds? Often hidden in the small print, sneaky pension provider fees may include a ‘contribution fee’, an ‘inactivity fee’ and an ‘exit fee’. According to a recent YouGov poll, 89% of people know little about the fees they’re paying.
What it’s costing you
These fees can have a big impact on your pension pot at retirement. For example, if you’re paying an annual fee of 2%, this could reduce your pension pot by 36% by the time you retire.**
How to fix it
If you sign up to PensionBee, once we’ve found your old pensions we’ll combine them in a new, good-value plan. We’re upfront about our fees: we only charge a single annual fee and there’s no hidden costs.
6. Ignoring your pension plan
When did you last check your bank balance? Chances are, more recently than you took a look at your pension balance. It’s important to keep checking your pension to make sure you’re on track to a reasonable retirement fund.
How much it’s costing you
It’s often hard to tell, as many pension providers send reams of paperwork through the post with the figures buried. To see whether you could be losing out when you retire, you need to know how your funds are performing and whether you need to make any adjustments. At the very least you should check your pension every year and each time your circumstances change.
How to fix it
If you pick a PensionBee plan, you will have 24/7 online access to your pension, so you can easily check how much money is in your pension pot, how your funds are performing, and how much you’re likely to receive on retirement.
Have you made any of these pension mistakes? Are there any you think we’ve missed? Let us know in the comments section at the bottom of the page!
* These figures are intended for illustration only. As with all investments, capital is at risk and the value can go down as well as up. We have assumed a retirement age of 65, that your plan earns a 5% return before the effects of inflation and have taken inflation of 2.5% into account.
** Standard assumptions apply. This calculation is based on a pension pot of £20,000, and is an illustration of how much the fees may reduce your pension pot by, when you reach retirement age.
