You most likely have an idea of how you want to spend your retirement. Whether you want to stay at home with your family, or spend your older years relaxing on a beach in the south of France, it’s essential you start building a pension pot as early as possible.
There are many different things to remember when you are saving towards retirement, some more important than others.
So, for you to make the most of your savings and live the retirement of your dreams when you stop working, here are five silly mistakes you should avoid when you’re building your pension pot.
1. Don’t refuse to join your workplace pension
These days, your employer will normally automatically enrol you in their workplace pension scheme. You’ll normally pay a minimum of 5% of your salary to the scheme, including basic-rate tax relief.
A workplace pension is a great and tax-efficient way to save for your retirement. Crucially, your employer will also make contributions to your workplace pension that must be equivalent to at least 3% of your income.
You may find that, although employers must pay a minimum of 3% of your earnings into your workplace pension pot, some may be willing to pay more. Many will match your contributions if you decide to increase the amount you contribute.
If you opt out of your workplace pension scheme, you could end up missing out on a lot of "free money" from your employer. Even though 3% of your salary may not seem like a lot at first glance, it can go a long way in helping you to save for the retirement of your dreams.
So, even if you are in your employer’s workplace pension scheme, you should always speak with your employer and review the plan to ensure you’re taking full advantage of it.
2. Don’t fail to claim any additional tax relief if you’re entitled to it
When you make contributions to your pension pot, you are usually able to claim tax relief on any contributions.
The tax relief rates on pension contributions are as follows:
- Basic-rate taxpayers receive 20%
- Higher-rate taxpayers receive 40%
- Additional-rate taxpayers receive 45%.
For example, if you’re a basic-rate taxpayer, and you make a £200 contribution to your pension pot, the contribution will only “cost” £160, with the rest being made up by tax relief.
This is a brilliant way to build up money in your pension pot, so you may be surprised to learn that many higher- and additional-rate taxpayers don’t claim the tax relief they’re entitled to.
Indeed, the Telegraph reports that 8 in 10 higher-rate taxpayers who are eligible to claim the additional tax relief fail to do so. Also, more than half of all additional-rate taxpayers didn’t claim the extra relief they were entitled to.
If you’re a basic-rate taxpayer, you don’t need to worry about this – if your rate of Income Tax is 20%, your pension provider will normally automatically claim tax relief and add it to your pension pot.
However, if you are a higher- or additional-rate taxpayer, you should ensure that you’re claiming any tax relief you are due through your self-assessment tax return, as this could go a long way in helping you build a healthy pension pot.
3. Don’t neglect your pension pot
If you’re still young, chances are the last thing you’re thinking about is retirement. However, it’s important to know that the earlier you start making contributions to your pension pot, the more you could benefit from it when you eventually reach retirement.
Even making small, but regular, contributions can go a long way to boosting your retirement savings. If you do neglect your pension pot when you’re young, you won’t notice much of an impact at the time, but you’re going to start to feel the sting as you approach retirement age.
Compound returns can turn small contributions into a healthy sum of money when you eventually do reach retirement.
So, thanks to the snowballing effect of compound returns, you shouldn’t neglect or forget to make payments into your pension pot.
4. Don’t lose track of your pension pots
The excitement of life can sometimes make it difficult to keep track of your finances, especially if you are frequently changing jobs or moving house.
This is especially the case for pension pots, particularly if you have multiple pensions with previous employers.
According to Standard Life, there is over £19 billion in pension savings left unclaimed in the UK, with an average of £13,000 in each pot.
While you should ideally aim to keep track of your pension pots, it can become tricky as you progress through life. To avoid losing your pension pots, you should ideally inform your pension provider when you move job or relocate to a different address.
If you do feel as though you have lost one of your pension pots, you should track it down as soon as possible.
The first step to doing so is checking if you have any old paperwork that alludes to your pension pot. It may have the name of your old employer or pension provider, which will give you someone to contact to see if they can give you any information related to your missing pension.
If all else fails, you could always use the government’s Pension Tracing Service. This is a free service that searches through a database of more than 200,000 workplace or personal pensions and should help you find the contact details you need to track down your pension.
Finding old pensions can give your retirement savings a real boost, as they may have grown significantly since you made your contributions.
5. Don’t just presume the State Pension will provide for you
Aside from your workplace and personal pensions, most people will be entitled to a State Pension.
As of August 2022, the State Pension will pay up to £185.15 a week and will usually be paid every four weeks into an account of your choosing.
So, with the Pensions and Lifetime Savings Association calculating that a single person needs around £10,900 for a minimum standard of living during retirement, you can see how a State Pension alone might not be enough to see you comfortably through retirement.
Despite this, according to Unbiased, 1 in 5 people who retired in 2021 will depend entirely on their State Pension.
Additionally, remember that the State Pension isn’t available until you reach the age of 66 (rising to 67 in the next few years). So, if you wanted to retire before this age, you likely wouldn’t have the money to sustain yourself if you relied solely on the State Pension.
This is why you should ideally build additional pension pots alongside your State Pension to ensure you can live comfortably during retirement.
Get in touch
Contributing to a pension throughout your working life can ensure you live the comfortable lifestyle you want in retirement.
If you would like to discuss pension saving methods further, please email us at enquire@london-money.co.uk or call (0207) 808 4120 to find out more.
Please note
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The value of your investments (and any income from them) can go down as well as up, which would have an impact on the level of pension benefits available.
Your pension income could also be affected by the interest rates at the time you take your benefits. The tax implications of pension withdrawals will be based on your individual circumstances. Levels, bases of and reliefs from taxation may change in subsequent Finance Acts.