Many people are feeling the pressure on their finances at the moment due to the backdrop of rising inflation and the cost of living soaring.
In these circumstances, it can be difficult to think about your long-term finances or even contemplate saving for the future.
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 !
However, even in the current climate there are ways to maximise the value of any pension savings you do have.
By sidestepping seven common mistakes, you could take your pension planning to another level and reduce the risk of falling short of money later.
SIMPLE RULES TO FOLLOW WHEN RETIREMENT PLANNING AND MISTAKES TO AVOID
1) DON’T TURN DOWN MONEY FROM YOUR EMPLOYER TO GROW YOUR PENSION
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. This is a key way to grow your pension and should be a bedrock to your pension plan.
Workplace pension schemes are made up of your own payments (5% or more of earnings), which are deducted from your salary, in some cases 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 qualifying earnings. 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 GOVERNMENT
Anyone who decides against investing in a workplace or personal pension also turns down help from the government. That’s because in order to encourage people to save for retirement, the government provides a top-up called ‘tax relief’ to pension payments. This is a great way to grow your pensino.
How you receive this tax relief depends 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 receive 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. And 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.
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, pensioners who are entitled to the full new single-tier State Pension receive £185.15 a week in 2022/23, worth £9,627.80 for the year. But remember that what you get depends on your National Insurance record, so you could get less. Pensioners that reached State Pension age before April 2016 and receive the basic State Pension get £141.85 a week, or £7,376.20 a year.
4) DON’T LOSE TRACK OF YOUR PENSION PLANS
It has never been more important to keep track of all your old pension plans. You are at most risk of having lost track of a pension if you have changed jobs multiple times, moved home often and not updated your pension providers or opted out of SERPS (the State Earnings-Related Pension Scheme) in 1980s or 1990s.
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. It’s important to therefore have a retirement lifestyle in mind. We can discuss with you how much money you could have in your pension pot in the future, so you can ensure that you don’t find yourself in a situation whereby you have an income shortfall.
6) DON’T LEAVE YOUR PENSION POT UNLOVED OR NEGLECTED
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.
Knowing whether it’s workplace or private, understanding how to get more ‘free’ payments from your employer or the government, or using it to pay less tax (such as through bonus sacrifice) 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. For example, if your retirement is still some years ahead, you could potentially afford to take a little more risk. Conversely, you may want to dial down the risk as you get nearer to retirement.
IT ALL STARTS WITH A FINANCIAL PLAN, TO HELP BRING YOUR GOALS TO LIFE
Do you have a dream retirement in your head? Are you on track to make it a reality? To find out more about how we can turn your dreams into reality, please contact us for more information.
If you would like to discuss this in more detail or any other financial topic then get in contact. The next step is down to you to change your life.
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- Calling us on 020 8611 2521 / 01252 411 851
- Compton Financial Services – here to meet all your pension, investment and mortgage needs.
Compton Financial Services Limited is an appointed representative of New Leaf Distribution Ltd which is authorised and regulated by the financial conduct authority (FCA). FCA number is 460421.
Our services relate to certain investments whose prices are dependent on fluctuations in the financial markets beyond our control. Investments and the income from them may go down as well as up and you may get back less than the amount invested. Past performance cannot be used as a reliable prediction of future performance.