The cost of living crisis is forcing millions of people to tighten their spending habits and make cutbacks to keep ahead of record-high inflation and soaring energy bills. The current climate can make it difficult to think about your long-term finances or even contemplate saving for the future.
Jenny Holt, Managing Director for Customer Savings and Investments at Standard Life said: “Most people are feeling the pressure on their finances at the moment due to the backdrop of rising inflation and the cost of living soaring. However, even in the current climate there are ways to maximise the value of any pension savings you do have.”
Ms Holt explained that by side-stepping seven common mistakes, you could take your pension planning to another level and reduce the risk of falling short of money later.
Seven pension mistakes to avoid
Standard Life, part of Phoenix Group, shares seven simple pension mistakes everyone trying to build a retirement savings pot should try to avoid.
1. Don’t turn down money from your employer
Standard Life explained that when offered the opportunity to join a workplace pension, it’s nearly always a good idea to do so. For most people, your employer must automatically enrol you in a workplace pension scheme, and you may even be offered a pension plan if you don’t meet the criteria.
Workplace pension schemes are made up of your own payments (5% or more of earnings) which are deducted from your salary, often before you pay tax, making it easier to save, and your employer’s contribution, which at the very least, must be equivalent to 3% of your earnings.
Ms Holt advises that many employers offer more than this or match any extra payments you make so it’s worth checking if you’re getting the most out of this valuable benefit.
2. Don’t say ‘no’ to extra money from the UK Government
In Scotland, the tax relief details differ slightly, but in all these cases, the general point is the same - each time you defer paying into a pension plan, you miss out on an extra boost.
“Anyone who decides against investing in a workplace or personal pension also turns down help from the government,” warns Ms Holt.
She continued; “That’s because in order to encourage people to save for retirement, the UK Government provides a top-up called tax relief to pension payments. The nuts and bolts of how you receive this tax relief depend on the type of plan you have and the rate of income tax you pay. But as an example, if you’re a basic-rate taxpayer saving into a personal pension in the current tax year, you get 20% tax relief on your payments.
“So, if you pay £200 a month into your pension plan, the £40 of tax relief you receive on that payment means it will only cost you £160. Higher-rate or additional-rate taxpayers could claim back even more.”
Some workplace pension schemes offer tax relief in a different way, such as through salary sacrifice or exchange schemes, so check with your employer if you’re not sure how this works for you.
3. Don’t expect the State Pension to cover everything
Another common mistake is to assume that the State Pension will meet your retirement needs. However, it’s important to know that the State Pension won’t be available until your late 60s, and may not cover all of your outgoings.
Currently, the New State Pension is worth up to £185.15 a week, or just over £9,600 a year. At the same time, the Pensions and Lifetime Savings Association (PLSA) calculates that a single person needs £10,900 a year for just a ‘minimum’ standard of living in retirement.
This rises to £20,800 a year for a ‘moderate’ lifestyle, which includes a car and some help with maintenance and decorating each year.
4. Don’t lose track of your pension plans
There are over £19 billion worth of pension savings lying around unclaimed in the UK, with an average of almost £13,000 in each pot, according to Standard Life.
If you have moved jobs or home a few times, and not informed your pension provider, then one of these ‘lost’ pension pots could be yours, so it’s worth spending time tracking down any potential missing pots to help boost your future finances.
5. Don’t assume that the minimum is enough
“Auto-enrolment has boosted the pension savings of millions of people but the 8% minimum payment may not get you the retirement lifestyle you want,” suggests Ms Holt.
It’s important to have a retirement lifestyle in mind, the PLSA calculations can be helpful as they can give you a real figure to aim for, and you can then work out what’s feasible and put the necessary steps in place to help you achieve your goals.
6. Don’t leave your pension pot unloved or neglected
Ms Holt warns: “You might not want to talk about your pension plan every day, but dismissing pensions as boring is a mistake, and one that becomes increasingly serious over time.
“While this might be difficult at the moment, steps such as topping up your payments, especially in your 20s, 30s or early 40s, can make a large difference, thanks to the snowball effect of compounding.”
Giving your pension plan some love could make a major difference to your long-term finances.
7. Don’t suppose that one pension plan is the same as another
“A related mistake is not knowing where your pension pot is invested, whether that matches your life-stage and priorities or how to choose the right investment options,” said Ms Holt.
For example, if your retirement is still some years ahead, you could potentially afford to take a little more risk - or you may want to dial down the risk as you get nearer to retirement.
To keep up to date with the most-read money stories, subscribe to our newsletter which goes out three times each week - sign up here.
- DWP urges older people to apply for ‘passport’ benefit even if they only get awarded a penny
- Quickly check if you qualify for Cost of Living Payments worth up to £1,100 this year
- DWP could give people of State Pension age with back pain up to £92 each week
DWP benefits older people can no longer claim when they reach State Pension age
DWP urges family members to check if older relatives are due an income boost