In times gone by previous generations could look forward to their retirement, living out their golden years without financial burden. Nowadays the pension landscape is a lot more complicated and financial security in later life isn’t guaranteed.
To prevent a retirement savings shortfall it’s time to get serious about your pension - whatever your age. Here are four of the most common mistakes you should avoid.
Your current contributions aren’t big enough
Thanks to auto-enrolment British employers have to place all eligible staff in a workplace pension scheme and contribute a minimum amount by law. Typically, contributions will be matched by your employer to a certain percentage and then it’s up to you, the employee, to contribute above and beyond.
Several factors can influence the level of contributions needed to reach your retirement savings goal, chief among them how much time you have until retirement. For instance, retirement saving research from consumer brand Which? found that a couple hoping to secure an annual income of £26,000 in retirement would need to save just £131 per month in their 20s, £198 in their 30s, £338 in their 40s and £633 in their 50s. The longer you leave it before you start saving, the more you’ll have to save each month.
Our pension calculator can also help you find out how much you should be saving. Simply set yourself a retirement goal based on your desired income for each year of your retirement, input your current age and the age at which you hope to retire, plus details of any savings you may have. It’ll then tell you how much you’ll need to contribute each month to make your goal a reality. While the results might not be what you were hoping for, it’s better to identify a retirement savings shortfall sooner rather than later, and while you still have time to rectify it.
To ensure you’re saving enough, it’s a good idea to check what your contribution level is, and increase it to as much as you can afford. Most workplace schemes can be adjusted easily so if your circumstances change and you need to reduce your payments, you can do so with minimum fuss. Whatever you do, make sure you’re paying in enough to get the maximum amount from your employer.
You haven’t paid enough National Insurance
When it comes to the State Pension, most people know that it may not be enough for them to live on, yet few know that the full amount isn’t always guaranteed. For in order to qualify for your full basic State Pension you’ll need to have paid National Insurance, or received credits, for 30 years or more.
National Insurance credits also count towards the 30 years
If you’ve worked for most of your life chances are you’ll have paid National Insurance for more than 30 years and will automatically meet the requirements, but if in doubt you should always check. On gov.uk you can find out how much State Pension you’re eligible for, when you can claim it and what you can do to increase the amount.
If you find that you have gaps in your National Insurance record, you can top them up with voluntary National Insurance contributions. National Insurance credits also count towards the 30 years and can be claimed for periods of unemployment, sickness or for time taken out of work as a parent or carer.
You’re paying hidden charges
All pensions come with charges, yet while you can expect fees to vary from provider to provider, transparency around each charge isn’t always the same. It’s a good idea to thoroughly read your paperwork, looking out for the charges that are to be expected, and those that may be buried in the small print.
The most common pension charge is an annual management fee which covers any admin costs your provider incurs looking after your fund. Exit fees are also applied on some older plans, and are charged the moment you withdraw or transfer your pension savings. Staggeringly some are as high as 77.60%, as our most recent Robin Hood Index revealed.
Less familiar are contribution charges and inactivity fees – the very definition of “damned if you do, damned if you don’t”. If your pension provider applies a contribution charge, it means they’ll take a percentage every time you add to your pension. While this is a fee that’s becoming less common, over time it could have a big impact on the size of your pot, if you make regular contributions.
Inactivity fees are charged when you don’t make any payments into your pension in a given time period so it’s especially important to look out for such charges on old pensions. Service fees, policy fees and underlying fund fees are often defined as management fees to cover the cost of administration, despite being charged in addition to an annual management fee.
Several cases have hit the headlines where small pension pots have been wiped out, thanks to ongoing charges. An engineering machinist from Rotherham lost an entire £1,300 pension pot after being charged six different fees.
While a young technology executive was told he’d have to pay an exit fee of £14,000 to move his pension. As of 31 March 2017 the government has imposed a 1% cap on early exit charges, but so far this only applies to people aged 55 and over.
To avoid falling victim to hidden charges it’s crucial to check statements regularly and keep track of old pensions. At PensionBee We only charge one annual fee across each of our plans, ranging from 0.5-0.95%. Plus, once your pension grows larger than £100,000 your fee will start decreasing - we’ll halve the fee on the portion of your savings over this amount.
You don’t know what your old pensions are worth
With the concept of a job for life disappearing faster than you can say “LinkedIn recruiter”, it’s now considered the norm to change jobs several times in your career. Whether you move on in search of better opportunities, career progression, job satisfaction or that all important pay rise – it’s important to keep sight of the benefits you clocked up in each role.
But what about your really old pensions? With the best will in the world it can be a challenge to manage multiple pensions, and with the passing of time it’s not uncommon to lose track. To find out the details of old pensions you can use the government’s Pension Tracing Service which uses the details you provide to find the names and contact details of your pension providers.
If you’re happy to put in the legwork you can trace previous pensions yourself by contacting former employers to request the details of the plans they have in place, before contacting each provider. Depending on the restrictions of each pension scheme you may be able to transfer some pots into your current workplace pension or a private pension, within a set period of time.
One of the most straightforward options is to combine all of your pensions into one with the help of a specialist pension service that can easily consolidate them on your behalf. At PensionBee we can take all of the hassle out of pension hunting by searching our employer and provider database and transferring all of your old pensions into one simple plan. This will make them more manageable, but could help to reduce your fees too. We just need a few simple details, like your old provider name, policy number and National Insurance number. The more details you have like this, the better, as it makes locating and consolidating all your old pensions much simpler. Get started today.
Are there any other signs should savers look out for? Tell us your thoughts in the comments section below.
Risk warning The information in this article should not be regarded as financial advice.