Planning

4 pension pitfalls you need to avoid

18 November 2020 | Posted by Hannah Duncan
office

One-third of us Brits have no idea how much money should be set aside for a realistic pension.

And worryingly, 41% of us don’t know where our workplace pension money is going. As a nation, we need to get clued-up so that we can make better decisions earlier. Retirement income is an essential part of financial planning – after all, it’s how we’ll afford our final thirty or so years. To help smooth the path towards a comfortable retirement, here are four pension pitfalls everyone should avoid.

Starting too late

The beauty of pensions is in the compounding returns. Over a long time, the money you put into investments statistically tends to grow, as profits get reinvested over and over. After several decades compounding returns can make a significant difference to your wealth. 

Take a look at this example below. Imagine you invested £10,000 into your pension pot, and the markets grew by 7%. If you’d put that money in at the age of 30, it would be worth £81,451 when you hit your 60th birthday. If you’d waited until you were 40 years old, just ten years later, you’d miss out on nearly half of the potential money, earning only £41,406. It’s still a great return but investing earlier would have been much better.

This explains why it’s so important to begin investing early. The sooner you begin, the more retirement money you’re likely to generate.

Thinking workplace pensions will be enough

Auto-enrolment for pensions hit our workplaces eight years ago. More than 10 million workers joined the scheme, meaning that around 4% of their qualifying monthly salary gets paid into a pension pot unless they opt-out. Employers also top-up pensions by a minimum of 3% of the qualifying gross salary, and the government chips in with around 1% as well.

It’s a great success for our future retirement incomes, but sadly, it’s nowhere near enough. The first £6,240 of a person’s income is not included in the pension calculations, and so lower earners and part-time workers are especially under-prepared. Many occupations such as cleaners, nursery nurses, cooks, receptionists, personal assistants, bricklayers and vehicle repairers contribute less than £2,000 a year. Ouch. For higher earners, there’s also a catch, as the qualifying pension goes from £6,240 to £50,000. And so any money over £50,000 doesn’t count. 

Experts predict 12 million or 38% of us working Brits are seriously under-saving for retirement. We’re sleep-walking into our future years, which are looking less and less golden. Thinking that the full state pension, which could give you a maximum of just over £9,100 a year (2020/2021 rules) and your workplace pension will carry you through retirement is a serious pension pitfall.

To avoid this trap, you could consider increasing how much you pay into your workplace pension, especially if your employer is kind enough to match your contributions. You could also open a private pension and make your own regular contributions, where you’ll likely benefit from government top-ups too. 

Not updating workplace pension details

The number of unclaimed pensions pots is incredible, and the number one culprit is house moves. People forget to tell their pension provider how they can be contacted; research shows that only 1 in 25 of us remember. It’s estimated that £19.4 billion worth of pensions is left unclaimed in the UK because of wrong addresses. This amounts to around 1.6 million pension pots with around £13,000 in each one. 

Sometimes people think the money in the pension pot is too insignificant to bother with. They remember contributing smaller amounts of money, or maybe didn’t realise that they had a workplace pension. However, over time, that money benefits from the miracle of compounding returns. A couple of thousand pounds several decades ago could easily be one of the £13,000 unclaimed pensions today. 

To keep every penny you’ve earned, and enjoy it in your retirement, be sure to update your workplace pensions with new addresses. You can normally do this online or with a letter. If you think you might have a lingering pension out there and you’d like to be reconnected, the free Government Pension Tracing Tool could help.

Not getting clued-up on scams

Pension scam victims each lose an average of £91,000. It’s heartbreaking to think that in just a moment, your life savings could be snatched away. And in the rise of COVID-19, the scams have got more sophisticated, for example, with the rise of convincing clone websites and psychological techniques, designed to trigger impulsive decisions online. 

Since 2019, pension cold calling is banned. If you or someone you know receives these calls out of the blue, you should not engage with them. Before making any changes to your pension, check that the pension provider is registered on the FCA website. This simple check could take a minute but protect a lifetime of savings. You can also visit the FCA’s ScamSmart website which helps you shield yourself from scams. If you suspect you’ve been scammed, contact your current pension provider immediately, they may be able to block transfers before it’s too late. 

Key takeaways

  • The sooner you invest, the more time your money has to grow 
  • The state and workplace pension probably won’t be enough to live off 
  • Millions of people miss out on their money by not updating their pension details 
  • Scams are getting sophisticated, always check that pension providers are registered on the FCA website
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