Retire in Peace: 3 Common Pension Mistakes and How to Avoid Them
Your pension is very important.
Typically, it will be your sole source of income during your golden years and will pay for everything from food to any medical expenses or care you may need in your later life. With the average life expectancy on the rise again, it’s never been more important to make sure your pension is secure. One false move and your quality of life during retirement is likely to suffer.
But the landscape of pension savings is changing, although these changes are not all that clear.
‘Whilst the broad outline of the recent pension reforms are clear, much of the detail is still lacking’ explains Lee Robertson, CEO of London-based wealth management firm Investment Quorum.
‘There are still a number of interim measures in the Finance Bill which are currently going through parliament, and with many of the longer term proposals out for consultation, we aren’t likely to know just what these changes to pension schemes mean until after the general election in 2015’.
So for all this talk of a newfound flexibility surrounding pensions, the state of the UK pension is now more unclear than ever. Meaning that you are much more likely to be making some critical mistakes which could have serious repercussions for your retirement.
Here we aim to show you some of the more common miscalculations you can make when planning for retirement, and how to avoid them impacting on your pension.
Not saving enough
With a recent study conducted by the Department for Work and Pensions concluding that nearly 12 million people aren’t putting enough money away for their pension, this is by far the most common problem for those facing retirement.
Although the government does provide a basic state pension for those over 61, the amount paid out by this (a maximum £113.10 per person a week) is quite simply not enough to maintain your working lifestyle into retirement.
Fortunately this is an issue which is easily fixed with some revisions to your saving habits.
By simply cutting back on some of your normal monthly expenditures and investing this into your own private pension fund, you could be ensuring that your retirement is a comfortable one.
Delaying your saving
During the early years of your career, saving for a pension is probably the last thing on your mind. After all, why would you want to put away money for your future retirement when you could spend the same money on that holiday you need so badly now?
But the longer you delay putting some of your salary away towards retirement, the more it will cost you to build a pension large enough to ensure a good quality of life during your golden years.
This doesn’t necessarily mean, however, that you should start saving in your twenties and continue until the day you decide to retire. On the contrary, by saving little but often early on in life, you could end up with a much larger financial pot than someone who started saving more than you later on as this will give your investment a much larger period of time to accumulate compound interest
In fact, saving as little as £2,500 a year only from the ages of 21 up to 30 could leave you with a retirement nest egg of around £553,000 by the time you’re 70 (assuming that the pension fund you are paying into continues to grow consistently).
Compare this with the £534,000 pension pot available to someone who contributes the same amount year on year but who only begins saving at the age of 31 and the perils of a shorter saving term becomes apparent.
Failing to review your pension regularly
Markets rise and fall, and there are various economic factors that can affect the value of your pension, and the amount of money available to you in your golden years. So you need to be changing your pension according to any changes in the market, or else you face the probability of a very precarious retirement.
Likewise, each time your own financial situation changes, it’s imperative that you adapt your contributions as well. Finally managed to get that promotion you were gunning for? Great! But make sure you’re putting some of that extra money you receive every month into your retirement fund. If you don’t, you may not have enough cash to cover any necessary future expenses like any future care
As a rule of thumb, you should be reviewing your pensions on a yearly basis. This means taking stock of the current market value of your various pension funds, whether or not they have grown or shrunk over the last year, and whether you have been contributing enough to them.
Although you can do this on your own, you will almost certainly benefit from talking to a chartered wealth manager.
More than just simply recommending the best stocks to put your money into, a reliable wealth manager will assess your own individual retirement goals and will tailor your investment options around these.
Relying too heavily on other sources
With a recent study by MGM Advantage showing that nearly 6 million people are planning to rely on their home equity to fund their retirement and a quarter of Britons expecting an inheritance windfall to bankroll their retirement, these are two of the more popular pension mistakes made by the average brit.
Although you could make a profit by trading in your 4 bedroom family home for a smaller property, the property market is notoriously fickle. There are no guarantees that you will recoup the money you shelled out on your house some 20 or 30 years ago, let alone make a profit on it. By relying so heavily on your home equity, you could very well be kissing your dream retirement goodbye.
Likewise, those soon-to-be retirees relying on family inheritance to top up their pension face an equally unstable future.
With recent research conducted by Skipton Financial Services indicating that more and more parents are opting to either leave a smaller percentage of their estate to their offspring, or none at all, by putting all of your retirement eggs into this particular basket, you are almost certainly going to miss out on the pension that you’d always planned for.
By ensuring that your retirement nest-egg is able to stand on its own two feet without the help of either your property or your inheritance, your retirement is that much more likely to be a comfortable one.
So although there are a myriad of mistakes you can make with your pension, and there are many more than the ones listed here, by knowing what the pitfalls are and taking the necessary steps to avoid them, you will be giving your pension the best possible chance to thrive.