One of the most important financial decisions we all need to make is saving for retirement. Putting money away into a pension for when the day comes that we retire from working, get the company’s gold watch, and go off to some warm, sandy, and sunny destination to live out the remaining days we have on this planet.
Unfortunately, as with other financial mistakes we may make, not all of us plan for this day of retirement.
In addition, there have been some recent changes the government has made to how we access our pensions, which can be confusing to some people.
The bottom line with retirement and pensions, is we need to always be thinking ahead, looking forward. Time does not stand still for anyone, and one day our working days will be behind us.
Planning for retirement doesn’t have to be rocket science, however for some it can be difficult to try and think that far ahead.
With that being said/written, there are some common pension mistakes we all may make at some point.
1) Not Saving For Retirement At All
Yes, there are those out there, and you know who you are, that are not contributing anything or saving anything for their retirement. In some instances it may be they don’t earn enough to be able to save, and some just don’t bother to think about retirement or putting together a pension.
There are many excuses for not saving for retirement, and one is “I don’t earn enough”.
Other excuses are:
* I don’t earn enough.
* I have too much debt.
* My living expenses are too high.
* I need to pay for my child’s education.
Financial Adviser Don Taylor said, “I feel that parents need to make their retirement savings and investing a priority. It’s far more likely that your children can find a way to finance their college careers than it is to expect your children to finance your retirement.”
2) Then there is the greatest excuse in the world….. I’ve got my state pension.
We are lucky that here in the UK we do have a state pension, but there have been some changes, and one change is the age at which we can begin receiving that pension. The ages have been increased, some of us will be well into our 60’s before we see a penny.
The maximum pension you can receive from the state is £164.35 each week. Could you live off this?
In addition, you can claim the full maximum amount if you have made National Insurance contributions for 35 years. Anything less than 10 years of contributions to the National Insurance and you may not be eligible for any state pension.
If you still have a mortgage or rent to pay, £164 is not going to go too far. We need to think of the state pension as icing on a cake, a little extra, a bonus.
3) Not Starting to Save Early Enough
It may be difficult for someone in their 20’s who is working to think 45 years down the road and plan for retirement and get a pension plan in order. However, that is exactly what they need to do.
Obviously the sooner you begin saving, the more money you will have at your time of retirement. However, it isn’t all about saving, it is all about interest, compound interest.
The money you are saving earns interest, which in turn also earns interest. Starting out younger allows the savings more time to grow.
By starting saving for retirement even by as much as five (5) years earlier, could add 30% more to your pension.
Someone in their 20’s could make much smaller contributions than someone in their late 30’s, as they have more time to allow the savings to grow.
4) Not Joining Their Company’s Pension Scheme
When you begin your working career and get a job at a new company, one of the things that is not on your mind is how to reduce your “take-home” pay. However, if your employer has a pension scheme, your effectively losing money if you do not contribute to that scheme.
Under the government’s new auto-enrolment scheme, all employers by 2018 have to offer workplace pensions.
By not enrolling in the pension scheme, you are throwing free money away!
Many employers will match your pension contribution to a certain amount, or contribute a percentage of what you contribute; they are giving you money.
An example may be this:
You put £40 in the pension scheme, your employer puts in £30, and the government provides £10 as tax relief. So a total of £80 is paid into your pension. Only £40 came from you.
5) Not Claiming Back Tax Relief
Remember in the example above and you contribute £40 to your pension, but get £80, and that £10 of this was tax relief from the government. Many people fail to claim this tax relief, they think it is an automatic thing.
It is not.
As to how much you will get back depends on your contributions and the top rate of income tax you pay.
“Basic-rate taxpayers (who pay 20% income tax) automatically receive 20% tax relief on all contributions. The money gets paid into their pensions automatically, whether it is operated by their employer or if it is a personal pension. This is known as ‘relief at source’.
Although the contribution is said to be increased by 20%, the way the relief is calculated means you actually receive a 25% uplift in your contribution. For example, if you pay £80 into your pension every month, the government will add another £20 – making the total contribution worth £100.”
As you can see, claiming this tax relief back is well worth doing.
6) “My House is My Pension”
In the instance of some landlords, my “buy-to-let properties are my pension”.
Property is a good investment, and usually over time as you pay down the mortgage, the property appreciates and you gain equity.
However, just planning on using your property to fund your retirement, is like putting all your eggs in one basket.
The property can be part of your overall retirement plan, not all of it.
Just as properties can go up in price, they can also go down, which would cause you to possibly lose money, or not have enough money for your retirement.
Also, in order to realise the equity in the property, or get the cash out of the house, you either need to re-mortgage it, or sell it.
Re-mortgaging at retirement age may not be possible, and it would give you a mortgage payment each month.
Selling the property is an option, however, you would then need to move somewhere, and begin paying rent.
Reverse Mortgages: There is one way you could access some of the equity in your property to aid you in your retirement, and that is through a reverse mortgage, or lifetime mortgage.
This is where you borrow money against the property, either as a lump sum, or monthly payment. You are allowed to live in the property, and not required to repay the loan, as when you die, the property is taken by the lender to complete the loan.
There are different types of lifetime mortgages:
* A roll-up mortgage: With this lifetime mortgage you can either receive a lump sum of money, or you can receive regular payments. Interest is added to the loan, which is calculated into the loan to be repaid when the property is sold.
* A fixed-repayment mortgage: This mortgage allows you to receive a lump sum payment with no interest. However, the amount to be repaid is a higher amount that the lump sum you receive. Again, this is to be repaid upon the sale of the property.
* An interest-only mortgage: This mortgage gives you a lump sum of money, however there is interest on the loan, which is to be paid monthly. And again, the original amount you borrowed is repaid when the property is sold.
So while reverse or lifetime mortgages have a place in a retirement plan, they should not be considered your complete pension package.
As we have shown, there are some common mistakes many of us make when it comes to saving or not saving for retirement.
There also is no one path of saving to take. You can consider your state pension, but also putting money into your own pension, one that your employer may contribute to as well, in addition to tax relief contributions. Saving for retirement is more than just doing one thing.