Pension Awareness Day falls on 15 September each year and is a great reminder going into the autumn that you should regularly check in on your pension.
Far too many Britons aren’t saving enough money for their eventual retirements. Research undertaken by Unbiased reports that 17% of over-55s (approximately 1 in 6) have no pension savings other than the State Pension.
Pension Awareness Day aims to put focus on this looming issue and help people get back on track towards meeting their retirement goals.
A report in the Scotsman details the possible ramifications of failing to effectively save towards your pension.
For example, if a 25-year-old employee on average earnings decided to lower their pension contributions by just 1% up until they reached State Pension Age, they would miss out on £18,400 upon retirement.
If their employer decided to follow suit and reduce their contribution by 1% then that figure would double to £36,800. Making this mistake could lead to a considerable pension shortfall.
However, there is no need to panic! Working alongside a financial planner means you can develop a smart plan that will help you reach your long-term lifestyle and retirement aims.
Read on to discover five mistakes to avoid when it comes to your pension contributions and empower yourself with the knowledge to make the right choices for your retirement.
1. Don’t contribute the minimum, as it could stop you from living your desired lifestyle
You read above about the potential impact of cutting contributions, but opting just to save the minimum each month can also have detrimental effects on your eventual pension pot.
The minimum monthly employee contribution to workplace pension schemes is 5% (including tax relief), and your employer must pay at least 3%. However, this is unlikely to save enough to achieve the kind of retirement lifestyle that you want.
One of the key objectives when working with a financial planner is to calculate how much your desired level of comfort will eventually cost, and to figure out the best way to build the funds needed to reach it.
Once you have a strategy, you can reflect on your monthly budget, and hopefully raise your contributions over the course of your working life. The more you save, the greater the probability of reaching your long-term goals.
2. Don’t miss out on the “free money” that is your employer’s pension contributions
Another problem with deciding to cut pension contributions as a means of making short-term savings occurs when you decide to opt out of a workplace pension scheme.
If you’re employed, you are likely to be enrolled in your workplace pension scheme paying a minimum of 5% of your monthly earnings. It might be tempting to claw that income back to help with short-term bills and spending needs.
But that could be a mistake as your workplace pension isn’t just comprised of your contributions.
Your employer will also contribute a minimum of 3% of your earnings to the pot each month. In some cases, employers might choose to pay more as a form of additional workplace benefit and opt to match any extra payments you decide to make.
By opting out of a workplace pension you’ll not only lose your own contribution but also your employer’s contributions, which is effectively “free money”.
3. Don’t rely on the State Pension instead of making regular pension contributions
The State Pension is a great safety net to have in place. It provides a guaranteed, inflation-proof retirement income.
However, it is unlikely to provide enough for you to live your chosen lifestyle.
It is doubtful that the State Pension will cover all your household outgoings and if you choose to retire earlier in life, it isn’t available to you until your late 60s.
The full new State Pension works out as £185.15 a week, or £9,627.80 a year, as of the 2022/23 tax year.
A study produced by Which? investigated the British public’s monthly retirement spending habits.
Source: Which?
It found that retirees living a “comfortable” lifestyle (all household expenses covered, as well as a monthly entertainment budget and annual European holiday) required £19,000 a year or a shared expenditure of £28,000 a year if they are a couple.
Relying solely on the State Pension would leave a shortfall of between approximately £8,740 and £9,370 a year dependent on circumstances. Even those with only basic, essential needs will likely require more than the State Pension provides.
It is important to understand that without additional pension savings or alternative income avenues, you will be unlikely to reach your desired retirement lifestyle goals.
4. Don’t miss out on the tax relief associated with pension contributions
The UK government is keen for citizens to save for their retirements outside of the State Pension and offers tax relief benefits as an incentive to maintain regular contributions.
Basic-rate taxpayers get 20% tax relief on their monthly contributions (2022/23 tax year), which effectively means for every £200 paid into a pension, there is £40 of tax relief, meaning the true cost is essentially £160.
The tax relief benefits are even greater if you are a higher- or additional-rate taxpayer, and you can claim an additional 20% or 25% tax relief through your self-assessment tax return.
Deciding to pause or reduce your monthly contributions could mean you miss out on this valuable tax relief.
5. Don’t lose track of your workplace pension plans
So, you’ve opted to maintain your pension contributions, you’ve kept the “free money” flowing from your employer into your pension pot, and you’ve saved by tapping into the associated tax relief. But what if you’ve misplaced your pension altogether?
Over the course of your working life, you are likely to change jobs several times. In doing so, it can be very easy to forget to update your old workplace pension scheme with your new details and keep track of old funds that you’ll want to claim come retirement.
A report in Pensions Age details how funds in lost or dormant pension pots across 1.6 million UK savers currently totals £37 billion, or an average value of £23,125 for each saver.
It is important to communicate with pension scheme administrators when changing jobs and ensure they have your up-to-date details. If the worst occurs and you believe you’ve lost track of a previous workplace pension plan then don’t worry, as there are ways to track them down.
The government website offers advice on tracing lost pensions or alternatively speak with us and get expert advice regarding your pension and long-term financial plans.
Finding a lost pension can boost your fund considerably as it may have been generating investment returns for years in addition to the amount you and your employer originally contributed.
Get in touch
Your pension is likely to be your main form of income come retirement.
So, it’s important that you follow the right steps throughout your working life to ensure you have the necessary funds available to you to achieve your desired level of retirement comfort.
For more information and to seek advice with planning your pension and long-term savings, contact us at helpme@aspirellp.co.uk or call 0117 9303510.
Please note
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future results.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates and tax legislation may change in subsequent Finance Acts.
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