Huge pension mistakes that could cost you thousands in retirement and how to fix them
PENSION savers have been warned about two mistakes that could cost them thousands of pounds in retirement.
New research by financial firm Annuity Ready has revealed two moves those with nest eggs made before Rachel Reeves’ Budget that could cost them in later life.
And you won’t want to make the same mistakes yourself, or could end up thousands of pounds worse off in retirement.
Research by the annuity comparison website found savers acted due to media speculation about what pension changes might be implemented in the Budget.
Two of those actions could see those savers’ pots worth less down the line.
The firm found 29% of those it surveyed withdrew money from their retirement pot earlier than planned, while a further two in 10 reduced their pension contributions.
The research by Annuity Ready also found 75% of respondents would not have taken those actions had they known what would actually end up being in the Budget.
Sarah Lloyd, director at Annuity Ready, told The Sun: “Our findings paint a worrying picture of how people can feel prompted to make significant decisions about their retirement savings in the face of uncertainty.
“What’s concerning is that these aren’t just small changes – we’re seeing people withdraw money early or reduce their pension contributions based on speculation rather than facts, which has real-world consequences.”
Over a third – 38% – of those who made changes to their pensions said they had done so because of the government’s decision to means-test the Winter Fuel Payment and the potential knock-on effect this could have on their finances.
In addition, only 29% said they trust in the stability of current pension policies more following the Autumn Budget.
A previous set of research by Annuity Ready also revealed that 57% with a pension pot liken the financial retirement process to “navigating a complex minefield”.
Sarah said the research showed a lot of people aren’t aware of how government changes can impact their pension pots.
“This creates a perfect storm where rushed decisions are made from a place of anxiety rather than informed choice,” she explained.
How to avoid devaluing your pension pot
Withdrawing cash early and reducing the payments you make into your pension may offer you immediate benefits, but both actions can mean having a much smaller nest egg to live on in later life.
Here’s how they can damage your pension savings – and how you can fix it.
If you withdrew cash early
Withdrawing cash early from your pension pot might offer a short-term financial boon, but there are major drawbacks to be aware of.
Money stowed away in pension pots is invested on your behalf with the aim of growing your pot over time, as investments tend to go up long-term.
Your money then benefits from compound interest.
This is where any returns earned on your pot are then reinvested, so you then make returns on a larger amount of money, and so on. Over time, this can see your money grow exponentially.
So if you take cash out, you’ve got less in your pension pot to invest, so your returns will be lower and you won’t benefit from as much compound interest long-term.
Not only that, but any money you withdraw from your pension pot early may be subject to income tax.
If you took cash out before the Budget, you may be able to reverse the decision if you do so within 30 days.
Provider AJ Bell recently wrote to customers who withdrew a lump sum from their pension pre-Budget to let them know they could put it back in.
It said to customers: “As this is the first time you’ve accessed your Self Invested Personal Pension, you have the right to change your mind within 30 days of receiving your tax-free lump sum.”
Check with your pension firm to see if they offer this option.
If you reduced your pension contributions
Reducing your payments into a pension might free up more cash in the short-term, but it will make your eventual pot smaller.
Like with withdrawing cash early, reducing payments and the overall size of your pension pot means you’ll have a smaller amount to invest, so you’ll benefit less from compound interest.
If you’re reducing what you pay into a workplace pension, your employer may decide to reduce its contributions, too – so you’re effectively giving up free cash.
What is pensions auto-enrolment?
HERE's what you need to know about pensions auto-enrolment:
What is pension auto-enrolment?
Since October 2012, employers have had to enrol their staff into workplace pension schemes as part of a government initiative to get people to save more for retirement.
When does auto-enrolment apply?
You will be automatically enrolled into your work’s pension scheme if you meet the following criteria:
- You aren’t already in a qualifying workplace scheme.
- You are aged at least 22.
- You are below state pension age.
- You earn more than £10,000 a year
- You work in the UK.
How much do I contribute?
There are minimum contributions that you and your employer must pay.
Your minimum contribution applies to anything you earn over £6,240 up to a limit of £50,270 in the current tax year. This includes overtime and bonus payments.
A minimum of 8% must be paid into the pension, with you contributing 5% and your employer paying at least 3%.
What if I have more than one job?
For people with more than one job, each job is treated separately for automatic enrolment purposes.
Each of your employers will check whether you’re eligible to join their pension scheme. If you are, then you’ll be automatically enrolled in that employer’s workplace pension scheme.
Can I opt out?
You can choose to opt out, but you’ll miss out on the contributions from the government and from your employer. If you do choose to opt out you can opt back in later.
In other pension news, experts have warned savers to ensure they have enough money to afford to be able to retire.
Plus, the exact date the state pension will be taxed after the Government confirmed its commitment to the Triple Lock.
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