After years of hard work, your retirement is a chance to relax and unwind, whatever that means for you.
Whether you plan to travel the world or downsize, tend your allotment, or take up extreme sports, you’ll want to know that your chosen lifestyle is budgeted for.
That’s where long-term retirement planning comes in.
With life expectancies rising, your pension funds might need to last three or four decades beyond your retirement date.
Making sure you have “enough” means avoiding some common pension mistakes.
Here are five of them.
1. Telling yourself you’ll start contributing tomorrow
While it’s never too late to start saving into a pension, the sooner you start, the better.
The earlier you start contributing, the smaller the percentage of your salary you’ll need to contribute. The rule of thumb is that you halve your age to arrive at the percentage of your salary you should be contributing each month.
Start contributing aged 20, for example, and you can put 10% aside each year until you retire. Start contributing at 50 though, and you’ll need to find 25%.
You’ll also find that a longer investment period makes clear the benefits of compound growth. Effectively interest on the interest you earn, compounding can make a huge difference over the longer term.
2. Taking insufficient risk
Like all investments, your pension is a long-term proposition. These timescales give you enormous potential for investment growth. But you’ll need to think carefully about your approach to risk.
Long-term investments allow your fund to recover from periods of economic uncertainty.
Over the longer term, you might find you can take more risk. This is especially true during the early years when your fund has the most time to recover.
Research published by IFA Magazine back in August 2021, found that 66% of 18- to 39-year-olds have a medium- or low-risk pension. Only 19% had a high-risk strategy.
Risk aversion during the accumulation phase of your pension could cost you later in life.
As you get older, the window for stock market recoveries begins to close and you can move into lower-risk funds to consolidate your gains. But timing is crucial.
3. Failing to claim the tax relief you are due
As an incentive to save, your pension contributions are topped up by the government. This “free” money is known as “tax relief” and it is automatically applied at the basic rate of 20%. This means £100 in your pension fund will cost you just £80.
Extra relief is available as a higher- or additional-rate taxpayer, at 40% and 45% respectively.
You can claim the additional 20% or 25% through your self-assessment tax return. As a higher-rate taxpayer, a £100 pension top-up will cost you £60. Additional-rate taxpayers will pay just £55.
Be sure to claim additional relief if you are entitled to it.
4. Assuming your minimum auto-enrolment contribution will be enough
Under current auto-enrolment rules, the minimum contribution is 8% of your pensionable salary. This comprises 5% from you and 3% from your employer.
Opting out of your workplace pension means missing out on this “free” money from your employer.
Not only should you stay enrolled in your workplace scheme, but you might also consider raising your contribution.
Back in May 2021, LCP (in partnership with Interactive Investor) released a report called ‘Is 12% the new 8%?’. It suggested that dated assumptions and low growth rates, among other factors, meant that the auto-enrolment minimum should be raised.
Increasing your contribution voluntarily, if you can afford to, could make a huge difference at retirement.
You’ll receive tax relief on your contribution, you might see increased potential for investment growth, and you’ll benefit from the added effects of compounding. In some cases, your employer might even be willing to match your increase.
5. Assuming your outgoings will be uniform throughout retirement
Increased life expectancies mean that your retirement fund might need to last for 30 years or more. A lot can change over that time.
Expenditure in later life is often thought of in terms of a “retirement smile”.
In the early, active years of your retirement, you might be spending money on big-ticket items. These might include house renovations or world travel. From a high starting point, your expenditure will begin to decrease as you get older and begin to slow down.
In later life, as the potential need for care rises, your expenditure could begin to curve upwards again, completing the “smile”.
Factoring these changes into your retirement planning is crucial. It’s something that we can help you with at Globe IFA.
Be sure to get in touch if you’re worried about the effect of irregular expenditure on your retirement plans.
Get in touch
If you’d like help avoiding these common pension mistakes, please email hello@globeifa.co.uk or call us on 020 8891 0711 to what Globe IFA’s expert team can do for you.
Please note
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.
Workplace pensions are regulated by The Pension Regulator.
