May 24, 2018 0

Top 10 Pension Mistakes in the UK

Top 10 Pension Mistakes in the UK

The future is always unpredictable. We do not know what might happen next; hence, , financial planning is the right thing to do. Youngsters today ensure they live their way, which makes it more essential for them to plan for a similar retirement life.

The first step here would of course be to understand why it is important and then taking out the time to look at options that will make the retirement life better; weigh in your choices and the options available. There are several factors such as income, lifestyle preferences and expenses that should be considered while planning your retirement.

The reliable investment for a post retirement living

Your pension fund is one of the most reliable sources of income post retirement. The UK government offers flexible pension choices, from which you could choose a plan that suits your lifestyle and expenses. Making the correct choice would depend on personal circumstances and the type of pension scheme you are enrolled in. You could either opt for an annuity, a drawdown or an Uncrystallised Funds Pension Lump Sum (UFPLS). All three choices have different criteria and pension benefits, which would impact your lifestyle and financial position in your retirement days. The government of the UK has set up a dedicated Pensions Advisory Service that consult and give advices to UK nationals on these pension schemes to assist them with their pension planning. The UK government has also introduced Pension Wise, which is a government-sponsored service that offers a 45 minute free consultation to UK nationals of 50 years and above, to provide impartial guidance on pension options.

With enough support from the government there is still a lot of lack of knowledge among the general public. Even among those who have a pension scheme, there is very low engagement and understanding about why pension planning should be done the right way.

To ensure you have a beneficial pension scheme, we’ve listed down for you the top ten pension mistakes you should avoid now so that your future is safe and financially stable.

The biggest mistake that you will make – Not have a pension scheme in place

The biggest blunder for anyone would be to not enrol in a pension scheme, especially if your employer is offering access to one. A work pension is like a small pay rise; you contribute a certain amount and your employer matches you up with the same or a part of the contributed amount. Though this might not seem like a very substantial investment, over the years, it will result in a large pension pot, which will help in your post-retirement days. Moreover, your pension pot is tax free, which only adds icing to the cake. You should also remember that pension contributions are updated by the government every financial year based on the inflation rate, so there are very strong chances that if you enrol in a pension scheme right now, you will not regret it later.

The second mistake will be not starting a pension account early

According to FCA, 45% UK adults do not think about pension planning until two years from their retirement date. It should be noted that even your pension fund needs time to grow, so the late you start, the more you miss out on the opportunity of reaping pension benefits. Delaying you pension funding and not starting early might cost you a good lifestyle post retirement. Let’s assume your monthly pension fund contribution is £110 until the age of 65, with your fund growing 6.0% per year post charges. Calculate the difference in the accrued amount when you start at the age of 20, 30, 40 and 50. On an estimate, every ten-year delay can possibly lower your fund’s growth by 50%.

Not saving enough

How do you decide on a pension figure that is enough to last you a lifetime? On an average, an adult would need £20,000–25,000 per year to live comfortably post retirement. To ensure you’re saving enough, draw an estimate of how much would suffice your needs, and save accordingly. You can withdraw a quarter of your pension as tax-free fund, and you may even want to factor in variables such as the State Pension Income, the inflation rate and taxes to determine your ideal retirement amount.

Not reviewing the pension fund

Reviewing your pension pot is as important as saving for pension. The performance of your pension fund will vary depending on several factors, such as inflation and the sectors your funds are invested in. Investments will not always lead to profits. A seemingly small hiccup in the market you are invested in could have a significant impact on your pension fund. Therefore, it is absolutely crucial to conduct periodic reviews of your pension pot.

Depending on property? It is not your pension

Many people consider their property as savings that they can use after retirement, but that isn’t the right way of thinking. Owning a house is a necessity, not an investment, unless you’re buying the house to let it out on rent or for sale. Apart from mortgage, a house will also need constant upgrades, maintenance, insurance and other taxes, which will only increase your liabilities. It is always safer to diversify your investments for better returns.

Not taking risks

People are usually hesitant and way too cautious when it comes to making pension investments. The most plausible explanation for this can be that investments usually tie in a person for 20–30 years before offering any actual benefits. Though this is true, it shouldn’t be forgotten that money will only grow when it is invested. Holding your money in cash may seem very appealing, but it is not a very smart way of growing it.

Opting out of employer benefits

Starting 2012, the UK government made it compulsory for employers to offer pension benefits to workers. If any company doesn’t have a pension scheme of its own, it has to take the services of a third-party provider to offer pension benefits to employees. Given these aids, it would be an absolute no-brainer to opt out of your company pension scheme.

Relying on the state fund

The weekly full State Pension for 2018–2019 is £164.35, which would roughly amount to an annual pay-out of £7,888, way less than the average annual amount (£20,000–25,000) required to maintain a decent lifestyle and will only take care of your food and basic shelter.

Ignoring the hidden and additional taxes

Your pension fund will be used by pension service providers and investment firms to make investments. Therefore, they will be a list of taxes that you’ll have to pay them, including consulting fee, Annual Management Charge (AMC) and transfer fee. These charges usually reflect as a certain percentage of the overall transaction amount and though they might seem quite small, over the years, these charges do add up, leading to large numbers. Therefore consider and enquire well about these charges before making a pension investment.

Not weighing in all options before choosing an annuity

An annuity is a pension option wherein a provider offers a fixed income throughout the retirement period in return for the pension fund. Most people jump in for the first annuity offer they land, which is usually from their current pension provider, but this can prove to be a grave mistake. The market is full of opportunities with service providers offering competitive rates on your annuity, so why settle when you can get the most of it? Then there is ‘enhanced annuity’ which entails over 1,500 medical and lifestyle conditions that could help you get a better annuity income. Though you don’t need to be actually ill for getting ‘enhanced annuity’, in the long run, it could offer more money for the remaining of your retirement days.

To help you understand the UK pension system briefly –

  • There are 3 major pension categories – State, Occupational and Individual / Personal.
  • These are further divided into 2-3 sub categories as mentioned below –
    • State pensions – Basic State  and State Second
    • Occupational pensions – Defined benefit and Defined contribution
    • Individual/personal pensions – Stakeholder, Group personal and Self-invested personal
  • You can access the UK pension system guide to understand the details of the various types of pension system available and which one can you opt for

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