Pensions are a hot topic at the moment, as we write a number of unions are threatening strike action and bodies as varied as the Office for National Statistics (ONS) and Scottish Widows have produced surveys showing how the membership of private pensions is dwindling.
Despite these reports and the general apathy towards pensions, they form a central part of many people’s retirement plans. We thought we would take a look at some of the pension pitfalls to avoid when planning for your retirement.
1. Do you really need a SIPP?
Many a dinner party conversation has been dominated by house prices and how much they had risen, more recently, SIPPs seem to have taken over as the hot topic of conversation. As an aside this may of course have much to do with the seemingly unrelenting stream of bad news about house prices but that’s another story.
Whilst having a SIPP may be perfectly sensible and the right type of pension for you, it is worth checking that your SIPP isn’t just something to talk about over dinner. We see people who have bought a SIPP, but don’t use the wider investment powers that it offers, investing only in funds. It is possible such people would pay lower fees and charges in a Personal Pension.
It isn’t always the case that a Personal Pension is cheaper than a SIPP, but if you are just invested in funds and will not move into other assets, it might be worth checking that you are not over paying on charges.
2. Poor performing funds
Most people who own a car will get it serviced on a regular basis, will know how much fuel costs and have a good idea how many miles per gallon the car does.
Do we know the same information about our pensions? How is it performing? What are you being charged for it? When was the last time you compared your pension to alternatives? These are all things we often do with our car but may rarely do with our pension.
You may well be one of those people who check the performance of your pension on a regular basis, if you are that’s great, but there are plenty of people who don’t. After your house your pension is often your largest investment, check regularly how it is performing, there are plenty of tools on the internet to allow you to do this, an IFA can obviously help too.
3. High charged contracts
Whether they are Stakeholder Plans, Personal Pensions or SIPPs all pensions have charges. Charges are a percentage of the amount you have saved or a fixed amount, either way you will pay a charge for having a pension.
Along with performance, charges are one of the main factors that affect how much you get back from your pension. It’s common sense really, all other things being equal, the less that is taken in charges, the larger your pension will be.
Recent research from Defaqto, a financial information provider, shows that for SIPPs charges are coming down. Whatever type of pension you have it makes sense to check that you are not being over charged.
We would strongly suggest that you review how much you are being charged for your pension and compare your plan to alternatives on a regular basis. We do it with other bills, why not with pensions?
4. Not joining your employer’s pension scheme
Along with performance and charges the other main factor is determining how much you get back is of course how much you pay in.
In these tough economic times, when the price of pretty much everything seems to be rising, making a pension contribution can seem like the last thing you want to spend your money on.
There might be help at hand though!
Many employers run pension schemes to which they will contribute on your behalf, you usually need to make a contribution too, but your employer’s payment is a great way of topping up your pension pot.
It might be the case that you didn’t know your employer ran a pension, or you decided not to join when you started your employment, either way, take another look, you could be throwing away a valuable pension contribution.
5. Forgetting about old schemes
Many of us move jobs on a regular basis, which can make it hard to keep track of all our previous pensions. Indeed Experian has an unclaimed asset register which shows that up to £400 million could be invested in forgotten life assurance and pension schemes.
If you think you have ‘lost’ one of your pensions the free Pension Tracing Service set up by the government in 2005 could help you. Since it was set up over 350,000 people have used the service, around 20% of these people have found a ‘lost’ pension which had an average value in excess of £20,000.
The fact that so many people have ‘lost’ their pensions shows the importance of keeping records of your pensions and making sure that pension providers and previous employers have your most up to date address.
It is after all your money, make sure you don’t lose track of it.
6. Not planning ahead
Many people say that when planning for retirement the early years are the most important, to some extent this is true, your first pension contribution is invested for the longest period of time. However, the years leading up to the date when you retire can be equally important.
As independent financial advisers we work extensively in the Annuity market and are constantly amazed at the number of people who come to us to buy an Annuity and are still fully invested in the stock market. Over the past month or so the FTSE 100 has fallen by approximately 5%, if you had been invested in a fund tracking this index you would now have less money to buy your Annuity.
The moral here? In the years leading up to your planned retirement date think about how your money is invested, should you be moving it to safer funds to avoid falls on the stock market? Again, an IFA can help you here.
7. Shop about, use your Open Market Option
If you plan to buy an Annuity with your pension make sure you shop about for the best rate, all Personal Pensions (including Stakeholders and SIPPs) have Open Market Option. This might sound complicated but it isn’t, it is simply your right to shop around for the best Annuity rate on the open market.
Being able to shop about for an Annuity is vital for getting the best Annuity rate, yet only about one third of people buying an Annuity do so.
To illustrate the benefit of shopping about, take a man aged 65, married to his wife who is 62, he has £100,000 to buy a level Annuity, which he would like to be paid monthly to him, be guaranteed for 10 years and pay a spouses pension of 50% on his death. The best income provided is £6,188 by Legal & General, the worst was £5,455 by Aegon; that’s a difference of over £700 every year. (Source: The Exchange).
You would shop about for any other major purpose, why not do the same when buying an Annuity? Not doing so can be an expensive mistake and because you can never change an Annuity it could be a mistake you live with for a very long time.
8. Missing out on a full State Pension
The state pension has been much maligned over the years; often unfairly so in our opinion. The full basic state pension is now £102.15 per week and is guaranteed to rise by an amount equal to earnings, prices or 2.5% each year, whichever is the highest.
To produce the same income from a Personal Pension you would need a fund well in excess of £100,000.
However, not everyone qualifies for a full state pension, this is generally due to gaps in National Insurance payments, but it can be rectified.
The first thing to do is get a state pension forecast and see how much you will get. This will show any gaps in your National Insurance payment record which you can then apply to fill. Making up for any missed National Insurance contributions can often be a very effective way of increasing your pension provision.
These are just some of the pension pitfalls to avoid, there are many more. The main messages are to shop about, remember that charges and performance will seriously affect the pension you get and finally, don’t dismiss the humble state pension.