Updated 13 March 2018
We can spoil our retirement years by the slip-ups we make today. These pension planning errors prove that forgetfulness is a young person’s problem, too.
We know about the really huge pension mistakes: not starting one, or starting one too late. These are the no-brainers. Other blunders may not be so obvious, until they land you in a groaning heap of regret. But, like pairs of shoes left on the stairs, you really shouldn’t let them happen at all.
Unless you request otherwise, your company pension will invest your savings in its default fund. This is a nice, comfortable option in that you don’t have to do anything. But is the standard option really the best for your needs? An independent financial adviser can help you answer that question, and perhaps make a choice that suits you better than those carpet slippers.
By now most people should have realised that the financial markets are like the British weather. Leaving your retirement savings unaltered for years is like wearing the same outfit in all seasons. Just as you would regularly update your insurance, your utility providers or your mobile phone contract, sit down with an adviser once a year to review your pension scheme.
It helps to have a broad understanding of the investment types that make up your pension. Some investments (like equities) are high yield but high risk; some are safer but slow to grow; and some have been shown historically to do well when other kinds do badly. What you need is the right balance of these, and what is ‘right’ for you depends on your attitude to risk. When you are close to retirement, you’ll want lower risk, which means more fixed-interest options such as cash and gilts. But if you have decades before you retire, you’ll want riskier investments like equities. This is where it gets (slightly) complicated.
Let’s say you’re happy risk-wise to have 50 per cent of your fund in equities. Let’s say those equities do well, rising in value over several years. But now you might have 60 per cent of your total investments in equities – so even though you didn’t move any funds, your risk exposure has shot up. This could prove a real pain later, so remember: unmonitored funds have a way of unbalancing themselves.
Conversely, bear in mind that a ‘lifestyle’ pension (where de-risking is done automatically each year) can also have drawbacks, by making it harder to recover losses once the funds are in lower-risk investments. Active, intelligent management is a way to avoid both pitfalls.
We’ve all had jobs we’d rather forget. But that’s no reason to forget the pension schemes that came with them. As many as ten per cent of savers have lost track of at least one pension held with a previous employer, according to research from Friends Life. Paperwork is lost, schemes change hands, letters are sent to old addresses. Can you afford to ignore many tens of thousands of pounds? Track down those lost pensions now, using the Pension Tracing Service (call 0845 6002 537).
Some people buy a single-life annuity and end up regretting it. A single-life annuity can look attractive because the income is generally higher – but if you have one of these and die, then your spouse will usually get nothing. All the remaining money you spent will go to the annuity provider, when it’s too late to scream that it’s not fair. Don’t let your spouse get the boot – make sure they’re covered.
Pension reform means that buying an annuity is no longer compulsory. However, many will still do so, for the security of a fixed annual income. But the trouble with any fixed income is inflation – if you draw a pension for many years then inflation may run away with your spending power. But you can inflation-proof your pension by choosing an annuity that gives you a small ‘pay rise’ each year.
Put your pension on a firmer footing
Those were just few of the obstacles you may find littering the pensions staircase. You can avoid all these and more by talking to an independent financial adviser. Even before you do that, have a look at our pre-retirement checklist to get an idea of the questions you need to address. Remember, decisions you take now could affect your whole retirement – so tread carefully.