In this article, we look at five mistakes that lead to people having a worse than average pension pot. Don’t make these mistakes and you will be on the road to a better and more financially secure retirement.
Not joining a pension
It’s important to have a pension plan of your own because the basic state pension for 2023/24 will only be £203.85 per week. This means that relying solely on the state pension could be a costly mistake when it comes to retirement. Additionally, the age at which you can retire is also being reviewed and could potentially increase to 68.
Apart from reducing the risk of financial hardship in retirement, pension plans also offer valuable tax benefits . If you pay the basic rate of tax, every 80p you put into your pension will be topped up by the government to £1. This means you add to your pension from your earnings before tax. If you are a higher rate taxpayer, the benefit is even greater. For every 60p you put into your pension, the government will add 40p.
Not taking full advantage of employers’ contribution matching
As per the latest pension reforms, all employers are obligated to make fixed contributions into their employee’s pension funds. However, a lot of employers exceed their legal obligations and offer to match the amount that the employees contribute. Hence, it is advisable to take advantage of this opportunity if your employer offers to match your contributions to a certain extent. It is a way to get free money and boost your retirement savings. The average employer pension pot contribution in the UK is 4.5%.
Being too cautious on investment choices
When it comes to investing your pension in your 20s, 30s, and 40s, it is natural to be cautious. The numerous investment options available, such as funds, shares, bonds, and REITs, can be overwhelming at first. However, before making any investment decisions, it is essential to understand the risks associated with each investment. By doing so, you can maximise your returns over the long term. It is important to note that you cannot access your pension until the age of 55, and this may increase over time. Therefore, taking on more risk can yield better results with such a long-time horizon. Pension pots are protected by the FSCS scheme.
For example, looking at the MSCI World Index, between 2013 and 2023, earned a return of 10.7% per year. This index tracks the global economy. With current saving rates on offer around 4%, investing in assets of appropriate risk for your age may yield significantly better results and lead to a better than average pension pot come retirement.
Not challenging the status quo
“Most employers’ pension schemes automatically enrol you into a pre-selected default fund chosen by the pension provider. However, it’s difficult to know whether this is the best fund for you or not. You also don’t have information on whether the charges the fund makes are reasonable or not. Moreover, many default funds are generally too cautious for investors under 40. Therefore, we advise you to review your current fund holdings and see if you can adjust them according to your risk appetite.”
Failing to review pension performance
We understand that reviewing your pension performance can be a dull task. If you notice that some of your funds are underperforming, assess whether it is due to a market downturn or the poor performance of the fund manager. To compare the performance of funds in each sector, we recommend using Trustnet. If you find that a fund is consistently performing poorly in the 3rd or 4th quartile for the sector, consider switching to a fund in the same sector that consistently makes it to the top quartile.