e recently read a story of a man who had emigrated to spain leaving an old private pension invested in the UK. He planned to use the pension to support him and his wife through their retirement. But, when he finally contacted his pension firm to access his pension pot he had a nasty surprise.
His pension company, who had been trying to contact the policyholder for years, had sold off valuable shares years earlier to cover the cost of unpaid fees. By his calculations, the pension pot that should have been worth over £100,000 was now worth just over £3000.
The Pension company were within their rights to cover the unpaid costs by selling shares held within his pension and they operated entirely legally. The policyholder, who had not updated his contact details with them for many years had not responded to numerous letters.
This story, whilst extreme, highlights the problem of not monitoring your pension, or understanding the fees involved.
Simon Garber, managing director of 2020 Financial and a financial adviser specialising in Pensions said: “It’s very common for people to leave old pensions and assume they will be worth a certain amount, but if something goes wrong they may not realise the implications until it’s too late to do anything about it.” Pension mistakes can be extremely costly, but they can also be avoided by following some sensible advice.
5 Common Pension Mistakes
- Not checking your annual pension statement
- Failing to regularly review old pensions
- Not being aware of ongoing fees
- Failing to have a retirement goal
- Not having a Financial Adviser
Pension Mistake 1 – Not checking your annual statement
Pensions are a long-term investment but that doesn’t mean that you shouldn’t be checking them regularly. You should receive an annual statement and by law, your pension provider must give you a pension savings statement if:
- your savings in a pension input period are more than the annual allowance i.e. you pay in more than £40,000 a year
- They have reason to believe that you have flexibly accessed your pension savings and your money purchase input amounts under the scheme exceeded the money purchase annual allowance
Even if your pension provider doesn’t have to give a pension saving statement, as a member you can still ask for this information.
Your annual statement can help you understand the value of your pension and whether you are on track to meet your retirement goals. It can also help you plan your savings tax efficiently, for instance, to maximise your tax-free pension contributions or use your tax-free ISA and savings allowances if you have exceeded the maximum amount of pension contributions.
You’ll also be able to see if you will be affected by changes to the Lifetime Allowance LTA, which came into force on 6th April 2016 and affects pension pots valued at over £1 million and if applicable, you may be able to take measures to protect your pension savings
It’s important that your pension provider has up to date contact details for you, so make sure you notify them if you move address.
If you need help tracing an old Pension we recommend contacting The Pensions Advisory Service, a government-funded organisation who offer free pension advice to individuals.
It’s important that you check and understand your annual pension statements.
Pension Mistake 2 – Failing to regularly review old pensions
If you’ve moved jobs in the past, it could be that you have old pension pots left in old schemes. You may be able to move them to your current workplace pension or move them into a self-invested personal pension where you can take charge of your investment decisions.
PLEASE NOTE: Some pensions come with enhanced benefits beyond the value of your pension pot. It’s important to understand the full value of benefits you may be giving up by moving the pension. We would always advise that you seek professional advice from Qualified Pension Specialist before moving any pension.
Pension Mistake 3 – Not being aware of ongoing fees
The pension market has changed massively over time and is now highly competitive. Fees are a big sticking point for a lot of people and, as the story shows, excessively high fees can erode the value of someone’s pension.
There are some newer pension products that both perform well and are not too expensive. It’s important to remember, especially with old workplace pensions, that the company chose the pension provider and product and it likely chose the one that was best for them as a business; sadly, they won’t necessarily have chosen a pension product that performs the best or provides the best value for their employees.
N.B. There are some pensions whose returns and benefits justify the higher fees they charge, but it’s not something you should take as a given – it’s worth speaking to a financial adviser to assess the fees you are paying for the returns you are getting and see if there are better deals out there.
Pension Mistake 4 – Not having a retirement goal
Goal setting is incredibly important when it comes to retirement plans. It’s not enough to pluck an arbitrary figure out of the air and hope it will be enough.
Simon explains, “We work closely with our customers to get a good feeling for the type of retirement that they want to enjoy – this includes many different elements like where and how they hope to live, what sort of car they want to drive, the types of holidays they want to enjoy, the cost of any hobbies as well as the potential cost of gifts for children or grandchildren. Every person we speak to is different – once we understand the type of retirement that somebody wants to enjoy, we can help them with the financial planning to get them there”.
Obviously the earlier you start planning, the better. Remember nobody ever said “I wish I’d saved less for my retirement”.
Goal setting 101
If you’re setting goals it’s important to set SMART goals. This way you’ll easily be able to see if you are on track to meet them.
- S – Specific (or Significant).
- M – Measurable
- A – Attainable
- R – Relevant (or Rewarding)
- T – Time-bound (or Trackable)
If your initial goal seems too far away, you can break down these goals into smaller milestones.
e.g. If your goal is to save £100,000 into your pension over the next 10 years, you can break it down to a goal of £10,000 per year or £833.33 per month and then work out how you get there, looking at whether you can: increase any employee contributions in a workplace scheme that might be matched by your employer, move cash savings into your pension to receive tax relief on pension contributions, reduce your monthly outgoings and save more etc… your goal may not be as far away as you imagine.
When setting your retirement goals you should:
1) Be clear on what you want in retirement.
- What sort of lifestyle do you want to have in retirement?
- Do you want to travel often?
- Do you plan to downsize or relocate?
- What hobbies/ activities will you do in retirement?
2) Know when you want to retire.
Do you dream of retiring at 55 or do you love what you do and never want to fully retire? It’s good to have an idea about when you want to retire since the earlier you do the more money you are going to need to find to fund your retirement.
3) Get your partner on board
If you have a partner it’s important that they are on board with your retirement plans. It’s worth sitting down together to plan and brainstorm the things that are important to you in retirement.
“If you don’t know where you’re going, any road will get you there”. Lewis Carroll
Pension Mistake 5 – Not having a financial advisor
A good Financial Advisor won’t just invest your money for you, they’ll also help you create a financial plan – set goals, regularly review your progress and look at different ways that you could meet your goal. They’ll help you to save in the most tax-efficient way, making the most of tax allowances so you get the most out of your money. And they’ll also make sure that your investments are balanced for risk, so you won’t find yourself over-exposed to any one area of the market.
Research has shown that having a financial adviser can significantly improve your wealth, whether you see yourself as wealthy or just getting by – read more about how Paying a financial adviser could make you significantly richer.
So if you want to improve your wealth in retirement and reach your retirement goals the evidence shows you’re better off having a financial advisor.
Those who received Financial Advice added up to 39% more to their liquid assets and 21% more to their pension wealth. ILC-UK report July 2017