Mention ‘pensions’ to friends and you’ll probably get a groan or something stronger. This may be down to boredom, but it’s more likely a case of anxiety.
Some people will know for a fact they’re not saving enough. Others will just have a nagging sense that they’re not getting it right.
If you fall into this second category, we’re here to help. We’ve put together the most common retirement planning pitfalls and some tips on what to do about them.
Not having a plan
The worst-case scenario is not having a pension at all, and relying on other avenues such as a lottery win.
There are all sorts of reasons why this is crazy. First off, the chances of you matching all six numbers in the Lotto are 1 in 45 million. Secondly, by forgoing tax relief on your pension contributions, you’re effectively turning down ‘free’ money.
Another version of this trap is to start a pension but then ignore it. Which brings us to the next pitfall.
Not reviewing your plan
Inertia is the enemy of retirement planning. You may have started a pension but have no idea what it’s invested in. Lots of people have moved jobs several times over the course of their career and with each new job picked up a new pension scheme. You may be in a similar situation with money in old schemes with high charges or poor returns.
Marriage, starting a family or getting divorced could also affect your pension. For instance, if you have children relatively late in life, you could still be supporting them financially when you’re retired. That will certainly take your pension requirements up a notch!
Regular reviews – ideally annually – can help you stay on top of this.
Not knowing how much you need
It’s often said that people need between half and two-thirds of their salary to maintain their lifestyle in retirement. But it depends on your situation.
When planning, remember that retirement usually comprises different phases – an active phase at the start; a quieter phase where people spend less on leisure; then a more expensive third phase where they may need to pay for care.
It’s hard to model this by yourself, and even harder to calculate the size of pension pot required to deliver it, so it’s worth getting advice.
Saving too much
“If only” is the likely response, but this problem is more common – and more serious – than people think.
There are two ways you can save too much. Firstly, if you exceed the annual pension allowance of £40,000, your tax relief could be clawed back. There are tapered allowance limits for high earners. For those earning above £150,000 this limit gradually begins to fall, eventually being reduced to £10,000.
Secondly, if you exceed the lifetime allowance on pension benefits (£1,055,000 in 2019/20), the tax hit later can be serious.
Having different schemes on the go can make it harder to track whether you’re close to the lifetime allowance, but regular reviews can help.
Besides, tax rules can change and taxation will vary depending on your individual circumstances. You should seek pensions and tax advice if you’re not absolutely sure.
We’re going to highlight other common retirement pitfalls in a future article. If you’re worried any of these may affect you, we’d be happy to help. Why not call us on 020 3823 8678 or complete the form below?