Many people avoid thinking about retirement until it is just around the corner, but this could mean missing out on tens of thousands of pounds. Whether it is just five years away or 50 years away, we should all be saving for our later life income. Here are six things to try and avoid.
Opting out of your workplace pension scheme
Auto-enrolment is now compulsory for workers earning at least £10,000 who are aged 22 and over. If you decide to opt out of your company pension you could miss out on thousands of pounds when you come to retire. This is because when you contribute towards your workplace pension, your employer does too, and to top it off you’ll receive tax relief from the government. Currently, the minimum contribution that employees have to make under auto-enrolment is 5% of their gross earnings. The tax relief applied to that is 20% for a basic-rate taxpayer and the employer contribution is 3%. The tax relief you receive depends on your individual circumstances and may be subject to change in the future. This is a great opportunity to get the ball rolling and secure a good income for later life.
Delaying saving for retirement
Saving smaller amounts of money over a longer period of time is often much more effective than saving bigger amounts over a shorter period of time, because compound interest has time to work its magic. Research from the Money Advice Service shows that:If someone saves £200 per month for 20 years they’ll have around £75,000, but, If someone saves £100 per month for 40 years they’ll have a pot size of around £123,000. This example would mean losing out on £48,000 despite having put away the same amount of money, which could be the equivalent of three years of income, or alternatively a sizeable inheritance to leave behind for your children and loved ones.
Failing to keep track of your pension’s performance
In the busy world we live in today people often cannot find time to do things and tend to put tasks on the back-burner, and sometimes never get around to doing them at all. However, when it comes to your retirement you cannot afford to forget. Regularly checking the performance of your pension fund is essential for making sure you’re on track to save enough. It may be that your circumstances have changed since you first set up your pension investments and now have a different attitude to risk. Or it could be that your pension isn’t growing as well as you thought and you need to reconsider where you have invested your savings. If you have more than one pension you could be paying several fees and charges so it might make financial sense to combine your pots. High charges and low growth could diminish your fund by thousands of pounds so it is important that you monitor performance.
Relying on the State Pension
The State Pension alone does not provide enough income to have a comfortable retirement. The full rate of the new State Pension is currently £168.60 per week (April 2019) and you need to meet certain criteria to receive this amount. This should be treated as extra income on top of your own provisions to boost what you have already saved. Aside from the low income offered by the state, the age at which you can access this money continues to increase in line with life expectancy. If you rely solely on the State Pension you may be forced to continue working past retirement age to top up your income.
Relying on your home
Some people may rely on the equity in their home to look after them when they retire. According to the Equity Release Council the most popular reason why people release equity is to boost their income once they have stopped working. However, this decision is not suitable for everyone and there are several pros and cons to consider.
Buying an annuity before shopping around
80% of people who purchased an annuity from their current provider could have got a better deal on the open market, so it is well worth shopping around before making any important decisions. After all, annuities are typically irreversible, so once you have bought one it’ll be too late to take advantage of a better offer. What’s more, there could be a difference of up to 60% in annuity income between the best and worst quotes available as shown in the graph below. It’s fair to say that your pension savings won’t look after themselves. It is important that you take responsibility for your later life income and make adequate provisions to avoid being in financial difficulty in later life.
The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article.