In our previous article on retirement traps here we highlighted the risks of:
not having a plan
not reviewing your plan
not knowing how much you need to save
saving too much
To complete our list of the top 10 pension pitfalls, here we look at six more.
Missing out on employer matching
Since April this year, the auto-enrolment rules mean employers have to contribute at least 3% of your qualifying earnings into your pension scheme (unless you opt out). Some employers offer more than this, particularly if you increase your own contributions. Unless you’re close to exceeding the lifetime allowance, opting out essentially means saying no to ‘free’ money.
Saving for a deposit instead of a pension
It’s understandable that people might focus on saving for a deposit on a house ahead of contributing to a pension. But this trade off could cost you dearly in the future. Under the new auto-enrolment rules, a 25-year-old earning £25,000 a year and contributing at the minimum levels (along with employer matching) could have a pension pot worth £403,000 by age 65. If the same person put off saving until they were 45, they’d only have £128,000 at age 65.
It’s an inconvenient truth when you’re beset by different financial demands, but retirement planning is easier if you start young.
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.
Taking a lump sum and banking it
At age 55 you can take a tax-free lump sum from your pension. Some people think it’s ‘safer’ to take this and put it in the bank rather than leave it invested. But inflation is currently running at just under 2%, and it’s unlikely you’ll match this in a savings account, which means your lump sum will continually lose purchasing power (i.e. value) over time.
Believing your home is your pension
People often assume they’ll fill a gap in their pension planning by downsizing their current home.
That’s one theory – but in practice, you may find it hard to leave your home (or your family may object). Or you may not be able to sell it for the amount you’d hoped. Therefore it’s best not to see this as your core retirement plan.
Underestimating life expectancy
Average life expectancy in the UK means that today’s 55-year-olds will live into their mid to late 80s. Around 10% of men and 20% of women will even reach 100.
Someone who retires at 65 therefore needs a retirement pot sizeable enough to last 30+ years. It’s a dizzying amount to plan for – just think if you’d been asked at age 18 to map your finances till age 48!
This takes us to our final pitfall.
Doing it yourself
Few of us would reject the help of medical professionals when it comes to our health, and few of us would attempt to fix our car ourselves. It should be no different with retirement planning.
It’s easier to get it right if you have help from professionals who can model different options, navigate ever-changing pension rules and generally steer you away from the most common pitfalls.
If you’d like advice about pension pitfalls and your own pension worries, we’d be happy to help. Call us on 020 3823 8678 or complete the form below to find out more.