Top 10 pension mistakes
Here are 10 are the most common ways people miss out on extra pension income:
1 – Not joining at all
The single biggest blunder is failing to join a pension scheme, particularly if your employer is offering access to one. Firstly, they will pay in for you and secondly, pension contributions are tax relievable. While it can be difficult to sacrifice precious income when money is tight, you won’t regret it down the line.
2 – Thinking you are too young to open a pension
There is no lower age limit for opening a pension; even babies can open one. Too many people in their 20s and 30s believe retirement is too far away to worry about. With state pension age heading towards 70 for today’s under 35s, this is certainly true.
However, the earlier you begin, the easier it is to build up a significant level of savings. Don’t think of contributions as ‘money lost’ but as ‘money invested’ and get used to investing a certain level of income as soon as possible.
3 – Under-estimating how much you need to save
£20,000 per year is the magic number, according to most surveys of ideal retirement income. This sounds like a reasonable amount until calculating that a 65-year-old can expect to live for 20 years and 20 x £20,000 equals £400,000, before investment growth. Plus you will want to draw a quarter of your fund as tax-free cash, so you need even more than this to produce the required income.
Even if you factor in a State pension income, you will probably need around £500,000 of personal pension savings.
4 – Relying on your other half
This point could also be called ‘ignoring your other half’. Why only save into one pension when you could get two lots of tax relief and then two lots of income (with two personal allowances to use up) in retirement?
5 – Forgetting to claim higher rates of tax-relief
Most pensions only provide 20 per cent tax relief on contributions and the rest has to be reclaimed via HMRC. Thankfully you have six years to do this. Visit HMRC for further information.
6 – Buying an annuity without shopping around
Annuities are widely accepted to be poor value, but can still be desirable to those who place high importance on guaranteed income for life, or for older pensioners who no longer wish to worry about an invested fund. If you want to buy an annuity, make sure you shop around to find the best rate available. People with certain health conditions, smokers and overweight people may be able to obtain a higher income via an enhanced or impaired annuity.
7 – Buying a single-life annuity without understanding the implications for a partner
Single-life annuities are just that… single. Too many people purchase these – often because the income available to them is higher than buying a joint annuity – without fully understanding what will happen when they die.
On death, all that money used to purchase the annuity (minus any income paid out) goes to the annuity provider. A surviving spouse gets nothing. The only exception to this is if the purchaser selected a ‘guaranteed period’ when they bought the annuity, which typically means payments are guaranteed for five years so the survivor will receive an income to the end of that period. Of course, if death occurs five or more years after purchase, the survivor gets nothing.
8 – Over-exposing a pension fund to equities
Equities are volatile, which is particularly risky if you are relying on an invested pension fund (typically finite capital) to provide you with a regular income for a long time.
Stock market crashes happen. Falls in value of 10 per cent, 20 per cent or even 30 per cent are not uncommon and can have a detrimental impact on how long your fund will last.
9 – Failing to nominate a beneficiary
This is particularly relevant for people who have no spouse or civil partner. It’s just a piece of paper, so make sure your pension money goes to the person or people you want it to go to. If not, there’s a fair chance it won’t. A nomination of beneficiary form allows you to choose and you can even select charities if you prefer.
10 – Failing to seek advice
Advice Schmadvice. What could possibly go wrong, eh? Actually, quite a lot. Advisers are the yin to the yang of investment managers; investment managers should be making you money, advisers should be saving you money.
Seeking advice can get the right assets into the right accounts for maximum tax-efficiency, can ensure you are not paying high fees unnecessarily and can prevent costly mistakes from being made with regards to older-style pension guarantees, transfer penalties, the lifetime allowance, estate planning issues and taxation on withdrawals.
Plus, most advisers worth their salt will assess your situation first before charging for anything. Plenty will provide you with an initial meeting or phone call for free.
11 – Invest in an ISA (one for luck)
ISAs look likely to be around for a while and, whilst offering no tax-relief on contributions, do provide a tax-free income on withdrawals. Plus, investments inside the ISA are taxed in exactly the same way as investments inside a pension.
Another key difference between ISAs is that there is no age restriction on making withdrawals whereas the earliest you can normally access a pension is 55… and this is increasing.
From 2028, the minimum age is going up to 57. There are plans to align this 10 years behind State pension age so younger people might have to wait until 60.
Investing into an ISA at the same time as a pension provides greater flexibility (at least currently), allowing you to access an income earlier than via your pension if desired.
Lauren Peters is pensions adviser with Tideway Wealth.