You may still have many years of career ahead of you, but delaying investing in your pension could prove to be a costly mistake. Many young people aren’t saving sufficiently for their retirement – something that could leave them struggling to pay the bills later in life.
However, there is still time to ensure your future funding. Follow these tips to fix these common pension problems in the UK:
Mistake #1: Putting Off Starting a Pension
One of the pension planning mistakes that people make is putting off saving at a later age. The earlier you start your pension, the more savings you will have when it’s time to retire. If you aren’t already saving, you should create your pension plan as soon as possible. Interest on your pension compounds, meaning the earlier you start your pension fund, the more interest you will make in the long run.
In Other Words
The later you leave your pension plan, the bigger your contributions will have to be to give you a reasonably sized retirement fund.
If you start a pension fund at 30 and make contributions of 15% from a £30,000 income, you can expect to have a pension of £196,100 when you reach retirement age. However, if you started saving at 45 with the amount, you would end up with only £109,500 to retire with.
Start saving towards your pension as soon as possible, as this will leave you with a larger fund when you retire.
Mistake #2: Not Joining a Company Pension Scheme
Companies are legally obliged to provide their employees with a workplace pension scheme. You should be automatically enrolled for your employer’s pension scheme, but you will also be given the option to opt-out of the pension scheme.
But There’s a Catch
Choosing to opt-out of your employer’s pension scheme could be costly, as this means turning down your employer’s pension contribution.
Legislation compels employers to pay a percentage of your annual salary towards your pension while you are making contributions. Many companies offer ‘contribution matching’, meaning if you increase your payments, your employer will too. If you chose to opt-out of your workplace pension, you are effectively turning down free money from the company.
The best option is to decline to opt-out of a company pension scheme. If you’ve already chosen to opt-out, speak to your Human Resources department about signing up.
Mistake #3: Having Multiple Pensions
Many people end up having several funds with more than one service provider, most often as a result of changing jobs. While it’s easy to leave these languishing in their respective accounts, having you pension savings spread across more than once place could impact on your retirement savings.
What Does This Mean for You?
Some of your funds might be in poor-performing schemes, or you may be paying high charges that are eating into your savings. Added to this, you’re losing out on earning compound interest by having your funds spread across different accounts.
It isn’t easy to quantify the cost until you know where all your pensions are. Once you’ve checked the paperwork, you will most likely find some of your money is in under-performing funds, or that you are paying high charges to certain pension providers.
Find all your old pensions and speak to a pension provider about the best plan for them – including if you should transfer them to one fund.
Mistake #4: Relying on Property Investments as a Pension
You might think your property will give you enough income to support you during your retirement, but that’s a risky plan.
Not only are you at dependent on the ever-changing property market, but you are also only likely to see your capital once the home has been sold.
A good pension scheme will invest your funds in a combination of categories. These include shares, bonds, property, and cash. Investing in a pension also allows you to access government tax relief. This tax relief sees the government pay £2,000 for every £8,000 paid into our pension.
Relying on property investments means you’ll also miss out on employer contributions.
Government pension advice that you will surely need to fix this is to make sure to supplement your property investment with a pension plan even though that it may already seem like a reliable option.
Mistake #5: Losing Pension Funds to Unnecessary Fees
Most pension schemes will require you to pay a management fee. However, many other costs could be deducted from your pension. These deductions are often hidden in the fine print and can include a fee every time you contribute, a charge when you stop paying in, or a deduction should you move your pension.
Did You Know?
You could be part of the 60% of people who said they had no idea how much they’re paying in pension fees1.
Additional fees can have a significant impact on your pension, eating away at your savings. If you pay an annual fee of 2%, your pension could be reduced by as much as 36% by retirement age.
Combine all your pensions into a good-value plan, with a provider that only charges a single yearly fee. Make sure to check for any hidden costs.
Mistake #6: Failing to Keep Track of Your Pension Growth
Much like you regularly check your bank balance, you should frequently be reviewing the performance of your pension fund. These regular checks will show you whether or not your funds are on track for your retirement.
These costs are often hidden in lengthy paperwork and are difficult to spot. You should be aware of how your fund is performing, which will indicate if you need to make any adjustments. Aim to check on your pension at least once a year and any time your finances change.
Regularly check on the balance in your retirement fund and how they are performing.
A Few Common Questions
Saving into a pension fund offers some specific benefits. One of these is tax relief, which is paid by the government2 into your pension and will allow you to save more. Your employer is also able to make contributions to your pension. Other benefits are that pension savings have low risk if well managed, earn compound interest, and guaranteed income during your retirement.
It would be best if you tried to save as much as possible in a pension fund, starting as early as possible. While some estimate saving between 10% 15% of your annual income, the best way to plan for your needs is to calculate the what you’d need (80 – 90% of your income) over the number of years you may live past retirement age.
On your death, most pension plans will pay out an amount to your beneficiaries. How much tax your heirs will have to pay will depends on your age at death, whether or not you are already drawing from your pension and the rules of your particular pension scheme.
You can expect to pay an annual management fee, which is usually set as a fixed amount, or as a percentage of the value of your pension fund. To avoid paying additional fees, ensure you check the fine print of your contract and ask your pension provider to unpack any expenses you can expect to pay.
Delaying the start of your pension savings can have a significant impact on the amount of money you may have to retire on. Retirement might seem a long way off, but the earlier you start contributing to this fund, the more money you will be able to save.