Pensions can often be a topic that people don鈥檛 think about much, or feel the importance to take time to research. Lisa Picardo, chief business officer for PensionBee in the UK 鈥 where they help customers to consolidate pensions, contribute and withdraw with ease 鈥 says that it is 鈥榥ever too late to get on top of your pensions鈥.
鈥淧eople do engage with their pensions at different points and for different reasons,鈥 Picardo says. 鈥淚t鈥檚 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.鈥
As the idea of pensions often go to the back burner of people鈥檚 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 鈥榬eally big鈥 and 鈥榮urprisingly very common.鈥 鈥淭his is not just about forgetting where your money is or even losing it altogether, but it鈥檚 about missing out on the opportunity to manage these savings effectively and achieve a better retirement outcome,鈥 she says.
鈥淭he 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.
鈥淲ith 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 鈥 that is one in 10 people who think they鈥檝e lost a pot.
鈥淏ringing 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.鈥
Not taking advantage of employer contributions
鈥淯nder auto enrolment, if you鈥檙e eligible and don鈥檛 opt out, your employer contributes to your pension which is essentially free money, along with the tax relief you receive,鈥 Claire Trott, head of advice at St. James鈥檚 Place says.
鈥淢any employers also offer 鈥渕atching,鈥 where they鈥檒l increase their contributions if you do. Failing to take advantage of this is like turning down part of your salary, as there鈥檚 usually no alternative benefit offered in exchange.鈥
Not making the most of your contributions
鈥淚t is very easy to put pension saving on the back burner,鈥 Picado says.
鈥淓specially when you are faced with other pressing financial priorities. However, if you delay or don鈥檛 contribute to your pension, it can significantly impact your pots鈥 growth over time.
鈥淢any people don鈥檛 contribute enough or don鈥檛 start early enough and therefore, they don鈥檛 really have the benefit of compound growth which is sort of like magic. Even small increases can make a world of difference.
鈥淭herefore to solve this, you should do what you can, when you can. Start contributing early. If you can鈥檛 commit to it fully, do it flexibly. A lot of people take the opportunity when they鈥檙e doing a tax return once a year to have a look at what additional contributions they could be making.鈥
Trott adds: 鈥淚 often suggest when you get a pay rise, consider putting half into your pension, your take home pay still increases, and you鈥檙e investing in your future.鈥
Claiming higher or additional rate relief
鈥淚f you鈥檙e a higher or additional rate taxpayer contributing to a personal pension, you may be entitled to extra tax relief but you won鈥檛 receive it automatically,鈥 Trott says.
鈥淵ou 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鈥檛 apply the change to future years in error.鈥
Making rush decisions with pensions
鈥淲hat we see when markets are turbulent is a lot of people feel worried about savings and act impulsively,鈥 Picado says. 鈥淭hey 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.
鈥淲hat 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.
鈥淭herefore, 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.
鈥淧ensions are long-term investments and are very much designed to weather the storm over the long term.鈥