Pensions can often be a topic that people don’t think about much, or feel the importance to take time to research. Lisa Picardo, chief business officer for PensionBee in the UK – where they help customers to consolidate pensions, contribute and withdraw with ease – says that it is ‘never too late to get on top of your pensions’.
“People do engage with their pensions at different points and for different reasons,” Picardo says. “It’s always a great idea to engage with your pension, because taking those proactive steps to consolidate and to engage now typically will lead to better retirement outcomes.”
As the idea of pensions often go to the back burner of people’s minds, there may be some common and simple mistakes being made that could effect their future. We spoke with pension and finance experts to explain what some of these may be.
Losing track of your hard earned pension costs
Picardo says people loosing track of their pension costs is ‘really big’ and ‘surprisingly very common.’ “This is not just about forgetting where your money is or even losing it altogether, but it’s about missing out on the opportunity to manage these savings effectively and achieve a better retirement outcome,” she says.
“The mistake that people make is that they essentially lose sight of their pensions because most of us are going to accumulate many pension pots over our careers due to the auto enrolment function here in the UK, which means that every time you start a new job, you get a new workplace pension.
“With more and more frequent job switching, people are going to amass a number of pensions over their lifetime. Our research shows that there are around 4.8 million pension pots that are now considered lost in the UK – that is one in 10 people who think they’ve lost a pot.
“Bringing all your pension pots together is therefore a great solution. It puts you in control of your financial future, helps to reduce the risk of forgotten or lost pots, helps to potentially cut down on fees and overall makes it easier for you to manage your savings.”
Not taking advantage of employer contributions
“Under auto enrolment, if you’re eligible and don’t opt out, your employer contributes to your pension which is essentially free money, along with the tax relief you receive,” Claire Trott, head of advice at St. James’s Place says.
“Many employers also offer “matching,” where they’ll increase their contributions if you do. Failing to take advantage of this is like turning down part of your salary, as there’s usually no alternative benefit offered in exchange.”
Not making the most of your contributions
“It is very easy to put pension saving on the back burner,” Picado says.
“Especially when you are faced with other pressing financial priorities. However, if you delay or don’t contribute to your pension, it can significantly impact your pots’ growth over time.
“Many people don’t contribute enough or don’t start early enough and therefore, they don’t really have the benefit of compound growth which is sort of like magic. Even small increases can make a world of difference.
“Therefore to solve this, you should do what you can, when you can. Start contributing early. If you can’t commit to it fully, do it flexibly. A lot of people take the opportunity when they’re doing a tax return once a year to have a look at what additional contributions they could be making.”
Trott adds: “I often suggest when you get a pay rise, consider putting half into your pension, your take home pay still increases, and you’re investing in your future.”
Claiming higher or additional rate relief
“If you’re a higher or additional rate taxpayer contributing to a personal pension, you may be entitled to extra tax relief but you won’t receive it automatically,” Trott says.
“You can claim through your Self Assessment tax return or by contacting HMRC directly to adjust your tax code. For regular contributions, one call is often enough. Just remember to flag any one-off payments clearly so HMRC doesn’t apply the change to future years in error.”
Making rush decisions with pensions
“What we see when markets are turbulent is a lot of people feel worried about savings and act impulsively,” Picado says. “They may withdraw funds or switch investments during a downturn, thinking that it will minimise their loss or protect their money. However, this can put you in a position where you actually do more harm than good.
“What happens here is they are crystallising that loss and lose the ability to recover as the markets rebound. Similarly, withdrawing too much once you reach pension access age can be a mistake because you can run out of money in later life.
“Therefore, when you do come to withdraw, you have to make sure that you are future-proofing and not taking too much in one go. If you are in drawdown and there is market volatility, try to ensure that you have some cash reserves or an emergency fund handy so you can draw on that. This can really help to ride out market storms without having to either sell investments or take too much at the worst possible time.
“Pensions are long-term investments and are very much designed to weather the storm over the long term.”
