24th June 2021
Most people do not contribute enough to their pension. Assuming a typical salary of £30,000 per year, the minimum pension contribution under auto-enrolment is £158.40 per month (of which £59.40 is paid by your employer).
Over 30 years, assuming investment growth of 5% per year (after charges), you could end up with a pension pot of just under £130,000. Your contributions will probably increase during that time, but then, so will the cost of living. If you use the fund to generate an income of 5%, this could give you an annual pension of £6,500. While this is a useful supplement to the State Pension, it probably won’t provide your dream retirement.
Increasing your pension contributions is often a good idea, especially if you are a higher rate taxpayer, as it can reduce the amount of tax you pay.
At the other end of the scale, it’s possible to contribute too much into your pension. For example:
Heavy tax penalties can apply for exceeding these allowances.
There are calculators available online to help you decide on the most appropriate level of pension contribution. Alternatively, a financial adviser can help.
Not Reviewing Your Pensions
If you have built up several pensions over the years, you might not be receiving the best deal. Older contracts in particular can be expensive and offer limited investment choice.
Modern pensions are flexible and most offer a wide range of investment options at a competitive cost.
It might be worth consolidating your pensions, not only to improve on the contract terms, but also to make it easier to keep track of your retirement pot.
However, some pensions offer benefits and guarantees that would be lost if you moved the funds to another provider. It’s best to seek financial advice when reviewing your pensions.
Not Taking the Right Level of Risk
If you are averse to risk, it can be tempting to keep your pension in cash or lower risk funds. But pensions are a long-term investment. Over a working life of 40 years or more, your pot could lose value in real terms, as it won’t be able to keep up with inflation.
In the earlier years, investing the majority of your pension in equities (shares) is the best way to enhance the long-term value. The value will fluctuate, and your fund may even lose money at times. But over time, the value should increase.
As you approach retirement, it might be appropriate to reduce the level of risk to protect the capital you have built up.
At any stage in your retirement plan, it’s sensible to hold a wide range of different investments. This means that you can benefit from investment growth, while smoothing out some of the ups and downs. A multi-asset fund or managed portfolio can allow you to diversify your pension fund, while leaving stock-picking to the professionals.
Taking Benefits Early
Currently, you can withdraw money from your pension at any time from age 55. This is rising to 57 from 2028, and thereafter will remain 10 years under the State Pension age. There are no limits on how much you can withdraw from your pension, although only the first 25% is free of tax.
But for most people, retiring at 55 is not realistic. Many of today’s workforce are likely to be working into their 60s and 70s.
Having access to your pension while you are still working can be useful if you need to clear your mortgage or help family members. But there are some disadvantages to taking your pension early:
Not Shopping Around
As you approach your retirement date, you might receive a benefits statement from your pension provider indicating how much income you could receive. Some pension providers offer annuities, which means you can convert your pension into a guaranteed annual income.
If you plan on buying an annuity, it’s worth shopping around for a few different quotes. Other providers might be able to offer better rates. If you have any health conditions, you may be offered enhanced terms.
Your pension provider might offer certain guarantees, so it’s important to understand how they work and when they will be lost. For example, you may be offered a guaranteed annuity rate, but without the option of a spouse’s pension.
Remember, you don’t need to buy an annuity at all. You can draw an income directly from your pension pot, while leaving the majority invested. This has risks, as the value can still fluctuate. But it also gives you a great deal more flexibility to vary your income and provide benefits for your loved ones. By opting for drawdown, you can still buy an annuity later on if this suits your circumstances.
A financial adviser can help you navigate the options, avoid these mistakes, and plan your ideal retirement.
Please don’t hesitate to contact a member of the team to find out more about pensions and retirement.