The pension decisions you make during your career have a significant bearing on retirement.
A well-executed plan could mean an early retirement and your dream lifestyle for the rest of your life. But pension mistakes and bad decisions can have far-reaching implications.
Keep reading for a look at some of the common pension mistakes you might be tempted to make, and what to do instead.
Mistake #1 – Not starting pension contributions at the beginning of your career
Retirement planning is a long-term proposition and the earlier you start contributing the better.
An early start gives you longer to save, which means more contributions, and more time for your money to benefit from investment and compound growth.
Auto-enrolment has made it easier than ever to start contributing to a pension, so make the most of it.
Solution – Remember that it’s (almost) never too late to start
The rule of thumb for pension saving suggests you halve your age to find the percentage of your monthly salary to channel into your pension.
Start your career at age 20, say, and you’ll need to put 10% of your monthly income aside for pension savings. Start saving later, and you’ll need to find more. At age 50, for example, you’ll need to find 25% each month. This is a large amount but that doesn’t mean it’s not worth doing, as long as your investment is still long term. This generally means between 5 and 10 years.
Mistake #2 – Not making the most of your workplace pension
Under current auto-enrolment rules, the minimum monthly contribution is 8%. This comprises 5% from you and 3% added by your employer.
Times have been hard for many over the last few years, with the coronavirus pandemic followed closely by a cost of living crisis. When your finances are strained, it can be tempting to forgo future savings for a comfortable life in the present. But this could be a mistake.
Solution – Prioritise your pension and increase your contributions if you can afford to
The 3% employer contribution you receive is effectively “free money” so rather than opting out of auto-enrolment, first look to budget elsewhere.
Remember too that if you increase your employee contribution, some employers might match your increase. It’s worth checking with your employer to see what they can offer.
Mistake #3 – Missing out on tax relief
Pensions are incredibly tax-efficient. You receive basic rate tax relief at 20% on all contributions you make. This means a £100 increase in the size of your pot costs you just £80. You might be able to claim extra relief.
For a higher-rate taxpayer, a £100 pot increase would cost just £60 (thanks to tax relief of 40%), while an additional-rate taxpayer would spend just £55.
MoneyWeek recently confirmed that almost a third (32%) of higher-rate taxpayers are either not planning to claim their tax relief entitlement or are unsure how to.
It’s a mistake that cost pension savers a massive £1.3 billion between 2016/17 and 2020/21.
Solution – Claim your extra relief now
You can read more about this in our recent article, How to claim your extra pension tax relief and why you should, which explains when extra relief is due and how to claim it via your self-assessment tax return.
Mistake #4 – Making the wrong at-retirement decision for you
At Fingerprint Financial Planning, we begin our financial planning discussions by getting to know you. It’s a great opportunity for you to think about the type of retirement you want.
Whatever your dream retirement looks like, you’ll need to match your pension options to that lifestyle.
Solution – Think carefully in the run-up to your retirement
If you have big plans for the early, active years of your retirement, you might consider a “flexible” pension option. A lump sum, or flexi-access drawdown, for example, will allow you to withdraw funds as and when you need them. This might pay for expensive travel plans or house renovations.
A traditional annuity, meanwhile, will provide a steady income for the rest of your life, perfect for paying known and regular expenses.
Poor decisions can have long-term consequences so be sure to speak to us before you choose.
Mistake #5 – Failing to factor longevity into your plans
As UK life expectancies rise, it’s important to consider the effect a longer retirement would have on your plans.
The latest Office for National Statistics figures suggest that a retiree aged 65 in 2020 could live for another 20 years on average.
Budgeting is key to ensuring you don’t run out of money, especially if you opt for a flexible pension option.
You’ll also need to think about unexpected later-life costs, like care, and the legacy you want to leave behind.
Solution – A robust financial plan with contingencies
Your retirement plan should factor in the potential costs of later-life care, with contingencies for what happens to that money if care isn’t needed.
A robust plan will allow you to live your dream lifestyle for the whole of your retirement while factoring in a tax-efficient inheritance for loved ones.
Juggling these competing expenses can be tough, which is why professional financial advice is vital.
Get in touch
If you have any questions about your long-term retirement plans, speak to us now. Get in touch by emailing hello@fingerprintfp.co.uk or calling 03452 100 100.
Please note
This article 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 not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance. The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
