The big 8 pension mistakes and how to avoid them
Can you really afford not to invest in a pension?
The simple answer is NO.
Unless of course, you have significant other wealth and/or expect to inherit a large sum of money. I’m not sure you’d want to rely on an inheritance though. If your parents end up needing costly nursing care or if Inheritance Tax rules change, you may suddenly see your future plans not quite working out as you had hoped for.
Contact Martin Dodd on 01902 742221 or email him at martin.dodd@miadvice.co.uk if you would like talk about money issues.
So, if you are thinking about your retirement, what are the most common mistakes that we have come across over the last 30 years?
- The biggest mistake of all is not investing in a pension at all
The basic state pension for this tax year (2015/2016) is around £116 a week for a single person and £185 a week for a married couple.
Whether you are single or married this equates to an income of less than £10,000 a year, which for most people would be extremely challenging to live on. It doesn’t help either that state pension age is increasing beyond age 65 as well. So you will have to work even longer before you will receive it.
- Don’t delay — start saving into a pension today
There are only three factors that determine how big your pension will be when you retire.
- How much you invest
- How much growth it achieves
- How long it is invested
In simple terms the sooner you start, the easier it will be to build up a big enough fund.
A delay of ten years before you start to invest in a pension can have a massive impact on the overall value of your pension by the time you get to retirement. Remember, it’s the early money invested that will grow the most, not the last contribution that you invested. I often hear people say “I’ve left it too late, so it’s not worth starting a pension now”. And in many ways they are right. So don’t delay, start now.
Some experts say, people should invest about half of their age as a percentage of their income. So if you start when you are 20, you should be saving 10% of your income each year into a pension, but if you leave it to 40, you need to invest 20% of your income into a pension each year.”
- Never opt out of your company pension
It’s free money.
If you opt out of your company pension, the chances are you could miss out on a great deal of money, possibly thousands. Most companies match employee contributions so if you don’t join your company pension, you are effectively saying no to free money.
- Your home is not your pension
Controversial to many I know. But a home is for living in.
The biggest problem with your home being your pension is this.
- It doesn’t give you an income unless you sell it
- Can you be sure you can sell it for what you would like
- Property by its very nature is illiquid
- If anything you home is a liability — it just keeps costing you one way or another
Additionally, this strategy is a one trick pony. It’ all your eggs in one basket. If you were investing in a pension, investing in one fund, would be very risky indeed.
- Don’t be too cautious, too young
Newby investors are understandably nervous about investing, after all by definition you are likely to be inexperienced and it is only natural to be conservative. But don’t be. When you’re young, risk is your friend. But not forever.
If the market is volatile, you may be tempted to lose your nerve and withdraw from your investments. Not good. At these times each month’s investment contribution will be buying more shares than if the market rose continuously. So long as the long term value of the shares rises, you will be better off.
Investing in more conservative over the longer term can leave you worse off than taking some risk in the earlier years. As you get closer to retirement, this is when to consider becoming more conservative or as I like to call it — “putting your pyjamas on”
The problem is this. Too many people just allow their investments to look after themselves. But this is a huge mistake. If you are member of a company pension, the chances are you are in a default fund. But is this the right investment for you. Is it the best fund for ?
Keeping focussed on your investments is more important than ever. It’s no surprise that those who understand what is happening with their investments generally do a lot better than those who have no idea what is going on.
- Stand firm in the face of adversity — don’t lose you nerve
Stock markets fall — that’s a fact. As you read this, we are either in the middle of a volatile market or one is in the making. That is just how markets and economies work., But many investors get nervous and stall out of the market. To be honest I used to get asked this all the time by my clients, but not so much these days. They’ve become much more financially aware since starting to work with me.
So some investors can’t deal with the falls and decide to stop contributing to the pension in case the value of the funds they are invested in falls. But this is the last thing you should do, unless of course you are about to take all of your money out, to spend it.
When the value falls, you are buying more, cheaper shares. Be brave and the sun will shine on you. The reward is when recovery comes and the market goes back up.
I meet people all the time that never review their pensions. Often is the case that they do not even know who their pensions are with. Sometimes finding the paperwork is difficult.
The problem with forgetting about your pension is this.
- If it’s going wrong, you wouldn’t know about it
- If you knew it was not working properly, you could do something about it
Action call
So what is the next step in getting your retirement plans in good order. Or to put it in a better way, what is the next step to make sure you are going to have loads of fun when you retire, going on holidays, spending time with the family or working on getting that golf handicap down. Get a good financial adviser to review your current situation. You can search for a financial adviser in your area by visiting www.unbiased.co.uk That said and here comes the personal plug. Why not drop me an email, the address is a few line below or call me on 01902 742221 to see how we can help put your future plans into reality.
Always consult a qualified financial adviser before making any tax or investment decisions. The above article is only for guidance and should not be taken as advice. If you would like to talk to me about getting your future investments on track please contact me.
Contact Martin Dodd on 01902 742221 or email him at martin.dodd@miadvice.co.uk if you would like talk about money issues.
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Written by Martin Dodd
Originally published at miadvice.co.uk on October 8, 2015.
