When it comes to our old age, there’s no escaping the fact that the State Pension isn’t really going to provide very much at all. And it’s going to be worse in years to come when its value has eroded further and people are having to wait even longer.
We really need to make provisions for our old age, but millions of UK savers are making the same common mistakes. Here are five I think you really need to avoid.
Relying on the State Pension
Far too many people don’t save any cash towards their old age at all, and many haven’t thought about how they’re going to live on just £8,500 per year.
It was fine to do that in my grandparents’ day. Their State Pension was enough to live on comfortably, and my granddad’s modest company pension helped them to have a decent holiday every year. But when it came to my parents, my dad’s good company pension really was needed.
It will soon be my turn, and I’m very glad I’ve accumulated some reasonable pension funds of my own.
Not saving enough
Once people do start to save, they frequently fail to stash enough away every month. My approach is to invest in dividend-paying FTSE 100 shares. But how much do I need?
If I can get 5% a year in dividend income (which I think is achievable) I’d need £100,000 invested for every £6,000 of generated annual income. And to build a £100,000 pot in the first place, assuming I could manage an overall 6% return per year, I’d need to invest £250 per month for 19 years. The more you save, the better.
Leaving it too late
When did you start thinking about saving for your retirement? I’ve had a couple of decent company pensions earlier in my working life, and they’re now transferred into my SIPP which I’m managing myself.
But remember that monthly £250 for 19 years needed to accumulate £100,000? You could more than double it by starting just nine years earlier — the first nine years is worth more than the next 19.
I really wish I’d started my own investments a lot sooner, when I was young and spending too much.
Taking what’s offered
If you’re in the enviable position of having a decent company pension when you retire, that’s great. But how will it be turned into a regular income for you?
Putting all of the cash into an annuity is still a common practice, even with today’s appallingly low rates, and many new retirees just accept what their pension manager offers. And once you’ve invested in an annuity, your lump sum is gone and there’s no changing your mind.
So shop around, look for better returns or more flexible options. Or, as I’ve done, transfer it all into a SIPP and manage it yourself.
Not facing facts
My Motley Fool colleague Harvey Jones has identified what I see as the biggest mistake of all when it comes to pensions. In some ways it’s a combination of the other mistakes I’ve covered here and more, but in other ways it’s bigger and more fundamental than all of these specific errors put together.
It’s simply not facing the facts, and I can only urge you to read Harvey’s words.
