A pension is often the financial “lifeblood” of someone in retirement. With the right planning, it can provide a comfortable income until your death. However, setting up a pension incorrectly could be highly damaging to your goals.
Many pension decisions are irreversible (or nearly so), such as buying an annuity or transferring a final salary pension. As such, you need to be sure of your decision. This is why working with a financial adviser can be so helpful – giving you much-needed clarity and peace of mind.
Below, our Carlisle financial planners reveal the top three pension mistakes we see amongst clients in Cumbria and how to avoid them.
#1 Losing track of your schemes
Did you know that as many as 1 in 20 people have a pension that they do not know about? Indeed, studies suggest that there could be 3.3 million forgotten pension “pots” somewhere out in the UK financial landscape. The total value is estimated at over £31 billion!
Could you be one of them? Think over your career and make a list of past employers. Did you get placed into any of their workplace schemes? If so, do you have all their details?
If you have lost any scheme information, consider asking your past employer for it (if they are still around!). Other options include the Government Pension Tracing Service, old CVs, payslips, P45s, or P60s. Gretel is another service launched in 2022 that may be worth looking at.
#2 Relying on the State Pension
The State Pension is a wonderful asset within a retirement plan. Not only does it provide an indefinite source of income throughout retirement, but the income also rises each year by at least 2.5% (under the “triple lock” system).
However, the State Pension is not sufficient for most people to live on in retirement.
In 2024-25, the full new State Pension provides £221.20 a week (£11,502.40 per year). Whilst it could cover essential spending for some people, it will not be enough to provide a “moderate” living standard in retirement (estimated at £43,000 per year, but the precise figure will depend on your situation and goals).
A good first step is to ensure you are on track to build up 35 full (or “qualifying”) years on your National Insurance (NI) record. This entitles someone to the full new State Pension. However, to achieve your desired retirement lifestyle, you will need to consider additional measures.
Here, it helps to consider your pension schemes – e.g. personal pensions which you may have opened yourself, and your workplace pension. Check your contributions and ask yourself if you are saving enough to reach your goals.
It is best to seek financial advice for clarity here. Simply relying on auto-enrolment is unlikely to be enough (i.e. a 5% employee contribution and a 3% employer contribution). An adviser can help you analyse your current financial trajectory based on your current saving habits and what adjustments may be necessary to put you on track.
#3 Not optimising your schemes
Are your pensions working as hard for you as they could be?
Many people simply make their monthly pension contributions (e.g. to their workplace scheme) and do not examine where the money is going, how their portfolio is constructed, or what other benefits they could be getting from their employer.
Here is a case in point for the first issue: many employees do not choose their investment strategy when enrolling in their workplace scheme. The typical result is placement onto the “default” or “moderate” risk portfolio, which may not suit their needs.
Some people could grow (or protect) their pension savings far more effectively by adjusting their investments. Other factors people should consider are fees, flexibility, and choice.
For instance, does your scheme offer a wide range of funds, or do they limit you to only one provider? Are the plan charges and fund management fees competitive relative to other options on the market? Even a 1% difference in fund costs can make a huge difference to the final value of your pot.
Finally, consider how your employer could help with your pension goals. Some employers offer a “matching” scheme (e.g. matching your contributions up to 10%). Taking advantage of this is tantamount to doubling your investment returns before any market price movement!
If you are considering opening a personal pension (e.g. to accept better fund choices), then consider whether your employer might divert their contributions to that scheme instead. They are not legally obliged to, but certain employers may be open to it.
Invitation
To discuss your own financial plan, please get in touch to arrange a free, no-commitment consultation with an adviser here in Cumbria.
This content is for information purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult your Financial Planner here at Vesta Wealth in Cumbria, Teesside and across the North of England.