Sadly too many of us are not taking retirement planning seriously enough and, as a nation, we’re woefully underprepared. If you’ve got big plans for what you’d like to do with your freedom in old age you’ll need to make sure you have a decent pension in place.
Here are five of the most common mistakes people tend to make when planning their retirement, and five ways you can overcome them.
Retirement planning mistakes
1. Putting off saving altogether
One of the biggest misconceptions about pension saving is that you can put it off until later. Yes, it’s true that it’s never too late to start saving, but the earlier you start the more money you’ll end up with. And, if you think about it, the later you start saving the more you’ll need to put away each month to make up for it.
Scottish Widows did some research that highlighted that the older a person is when they start saving, the more significant their contributions will need to be. To save enough to receive an annual pension of £23,000 a person would need to save £293 a month at 25 and £433 a month at 35. If they put it off until 45 they’d need to save £724 a month and £1,445 a month at 55.
2. Believing your State Pension will be enough
While it’s great that we have a State Pension system in the UK, it’s not quite enough to live off in retirement. The good news is the State Pension amount’s recently increased. Other than the fact that it’s not enough to live comfortably in retirement, the bad news is that you won’t be able to get this income until you reach 65. And, the age is only getting higher – it’ll be 66 by 2020 and 67 by 2028.
3. Underestimating the costs of retirement
If you thought you could rely on the State Pension then it’s likely you haven’t given much thought to how much money you’ll need in retirement. Underestimating how much you’ll need is perhaps the worst mistake you can make as if you end up with a retirement shortfall, you may be forced to return to work or sell any assets, such as your home, to fund your retirement.
It’s critical that you think about how much money you’ll need to cover your basic living expenses, plus the luxuries you’ve come to enjoy such as holidays and perhaps a new car every few years. Only you will know what standard of living you’ll be comfortable with in retirement and how much of your current salary you’ll need to achieve it.
4. Relying on property alone
Only investing in property is like putting all of your eggs in one basket, and it’ll leave your savings very much at the whim of the property market. For several years the prices may go up and up, but you’ll need to consider what might happen to your retirement fund if the market crashes.
Should you be reliant in the equity in your own home, then it’s also important to bear in mind the realities of downsizing. Moving property isn’t cost-free, plus finding a new home isn’t always easy - especially if you live in a desirable area.
The cost of moving house – and how you can make savings https://t.co/4ioHwxmPxy— Ideal Home (@idealhome) February 20, 2018
5. Losing track of workplace pensions
If you don’t know which providers your pensions are with, it’s likely you don’t have a clue how they’re performing. In the short-term this might not seem like a big deal because you vaguely remember where your money is, but in the long-term you run the risk of forgetting these pensions ever existed and could lose out on the money altogether.
It’s never a good idea to neglect your pension pots as they could be in poorly-performing funds that won’t maximise what you’ve built up. Plus, things like hidden pension charges could be having a negative effect on your pension causing your pot to decrease in size, rather than increase, once you’ve stopped paying into it.
5 retirement planning tips
Now you know what costly mistakes to avoid, here are five things you can do to rectify them when planning your pension.
1. Save whatever you can afford
You don’t have to be rich to save into a pension and if it comes directly from your wages, chances are you won’t notice the money’s missing. Even if you can only afford the 3% minimum required to be enrolled on your workplace pension scheme, make sure you don’t opt out of Auto Enrolment as you’ll be missing out on the 2% employer contributions.
Plus, if you’re retirement planning in the UK you’ll receive tax relief from the government so it’s well worth paying in whatever you can afford. Even when it doesn’t feel like much, it’ll make a big difference in the long run.
2. Make sure you qualify for the full State Pension
To qualify for your State Pension of £8,767 a year, you’ll need to have paid National Insurance contributions for at least 35 years. As you’ll already know, National Insurance payments automatically come out of your wages each month along with income tax, and only get paid when you’re working.
If you haven’t worked for 35 years or more throughout your career there are a couple of things you can do, such as claiming National Insurance credits for periods when you were caring for children or elderly relatives and topping up your contributions.
You can take a look at your National Insurance record online using the government’s check your State Pension service.
3. Use a pension calculator
Figuring out how much you’ll need in retirement income can be a challenge. Unless you’re due to retire in the next couple of years it can be hard to know where you’ll be or what you might want. What you need, though, is unlikely to change. Lots of research suggests you’ll need around 70% of your current income in retirement to cover basic living expenses and any extras you’ll want to enjoy.
Our pension calculator can help you figure everything out and will ask you your current age, the age you’d like to retire, how much you have in savings and how much you’d like to get each year.
4. Diversify your investments with a pension
Property can always be a good investment, but it’s important to protect your interests and reduce risk by investing in other things too. All good pension plans, like those offered by PensionBee, will invest your money in a portfolio that spreads your assets across a range of funds.
These may include shares, property, bonds and cash and, in the case of PensionBee pension plans, will be managed by some of the world’s biggest money managers. Whatever you choose to invest in, variety will give you a good chance of protecting your money and helping ensure you won’t be left short in retirement.
5. Track down old workplace pensions
If you have some of the paperwork, tracking down your old workplace pensions can be relatively straightforward. But if you run into difficulty the government’s Pension Tracing Service can help or if you’re a PensionBee customer our BeeKeepers will help you track down any old pensions and transfer them into your new plan.
Can you think of any other common pension mistakes? Leave a comment below and let us know if we’ve missed anything.
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.