5 pension mistakes that could hit your retirement income

Are you on the right track with your pension? Or are you making one of these five common mistakes? If so, it could hit your retirement income.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

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Saving for retirement is a huge undertaking. And with all those years of dedication and hard work, it would be gutting to receive a lower retirement income due to making some pension mistakes.

Here, I take a look at five common pension mistakes that could inflict some serious damage on your retirement income and how you can avoid them.

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1. Not using your workplace pension scheme

If your workplace has a pension scheme and you haven’t joined, you’re losing out on a lot of free money.

That’s because, under auto-enrolment rules, your employer has to contribute a minimum of 3% to your pension scheme.

Employer contributions and tax relief rules mean that it only costs £80 to contribute £160 to your workplace pension scheme. If you’re a basic rate taxpayer, when you contribute £80, the government adds £20 in tax relief and your employer adds £60.

That means you’re immediately doubling your investment!

If you earn £30,000 and don’t join your workplace pension scheme, you could be reducing your pension pot by £111,852 due to missed employers’ contributions alone (based on 3% contributions and 5% investment growth in your pension).

2. Staying in the default pension fund

Even if you’ve joined your workplace pension, it’s easy to forget about your investments and not check your fund choices. Recent research from the Pensions Regulator shows that as many as 95% of us stay invested in the default pension fund in our workplace pension scheme.

Unfortunately, the default fund you’re automatically invested in isn’t always the best choice.

The problem is that default funds have a one-size-fits-all approach and no two investors are the same. Default funds are often invested cautiously, assuming you have a medium attitude to risk.

If you start paying into a pension when you’re young then you have a long time before retirement. This means you may be able to afford a more adventurous fund choice to hopefully get a bigger retirement return.

Investing in a cautious fund that grows at 3% per year rather than 5% could mean reducing your pot by £145,545 by retirement (based on you earning £30,000, contributing 5% and your employer contributing 3%).

3. Not checking your pension fees

Fees can also have a huge impact on your pension pot and retirement income over time.

Many workplace schemes automatically have 1% management fees, but it’s possible to get fees of around 0.4% if you shop around with other providers.

It may be worth considering transferring old workplace pension schemes to a cheaper provider to save on fees.

Saving just 0.5% in fees could mean an extra £106,005 in your pension pot by retirement (based on you earning £30,000, contributing 5% and your employer contributing 3%).

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4. Not diversifying your portfolio

Most experts agree that you shouldn’t put all your eggs in one basket when it comes to investment.

That’s because investing in one or two companies will leave you exposed if those companies fail. You could end up seriously harming your retirement income.

Instead, consider investing in an index tracker fund and make sure you are invested across many geographies and in many sectors.

5. Not shopping around for a retirement annuity

When you get to retirement, it’s easy to automatically buy an annuity from your current provider. But they may not provide the best value option for you. You should consider shopping around to make sure you’re getting good value for money.

You may get a bigger retirement income if you keep your pension invested and go for income drawdown rather than buying an annuity. However, you should bear in mind that drawdown income isn’t guaranteed. You’ll still be invested in the stock market, and that can go down as well as up.

When you’re nearing retirement, it’s a good idea to get financial advice on your options. How you set up your retirement income is a big decision that could massively affect your wealth in retirement.

And finally

If you’re on a low income in retirement, then don’t forget to check out whether you’re eligible for Pension Credit. Recent research shows that many eligible retirees don’t apply and may be entitled to a bigger retirement income.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

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