5 Most Common Pension Mistakes to Avoid
Pensions can be difficult to navigate. There is no ‘one size fits all’ when it comes to having the ‘best’ pension fund out there because your pension is completely unique to you. However, there are some common mistakes that can and should be avoided by everyone, regardless of your financial situation.
In this article, we will identify the 5 biggest pension mistakes we see time and time again (as well as how to avoid them).
Mistake #1: Not having a retirement goal
It’s so easy to have a set it and forget it attitude towards your pension. While making regular contributions to your pension fund is great, those deposits will go so much further if you actually have a retirement goal in place.
This typically means determining how much money you would ideally like to have at the age of retirement and working backwards to see how much you need to save in order to get there. Without a goal, you’ll never really have a good handle on where you stand with your pension fund.
We highly recommend working with a qualified financial advisor to set your retirement goals with effective pension planning. An advisor will help you to plan out the most realistic goals for your own individual financial situation, and will also annually review your pension with you to ensure that you remain on track.
Mistake #2: Not keeping your contributions in line with your salary
We’ve talked about how inflation can have a drastic effect on your pension over time, particularly if you are a member of a Defined Contribution scheme. For this and other reasons, it’s important to increase your pension contributions over time as your financial situation changes. This could be an annual salary increase or a voluntary bonus contribution that is eligible for tax relief.
If your contributions remain the same over a number of years or even decades, you could be missing an opportunity to grow your pension fund. If you’re part of a company scheme, you’ll likely be contributing a portion of your salary to your pension so any increases in your salary will automatically be reflected in your pension contributions. However, there’s still a chance for you to take advantage of the upper percentage limit that your employer can contribute to your pension, so it’s important to make any tweaks to your contributions that will serve your overall pension pot in the long run.
Mistake #3: Making your business your pension
If you’re a business owner, you’d be forgiven for feeling that your company will eventually fund your retirement. But relying on your business as your pension is unpredictable, not to mention extremely risky. In the unfortunate event that your company goes out of business between now and when you retire, you could be left with very little funds to go into your pension.
Instead, it’s much wiser to put a percentage of your business profits into a pension fund. If your business does eventually fund your retirement, great. If for whatever reason it doesn’t, you’ll still have a pension to draw once you reach retirement.
Mistake #4: Relying solely on the State pension
The weekly State pension rate in Ireland is currently €253.30 and retirement age is 66. Right now, 60% of those aged 20-69 without pension coverage are planning on relying on the State pension as their sole source of income in retirement.
However, there are a few potential issues with this way of thinking. It’s predicted that the average life expectancy in 2029 will be 85.7 for women and 82 for men. The pension age at that time is expected to be 68. You’ll need to carefully consider the following before completely writing off the idea of setting up a pension fund:
- Will you still have a mortgage at retirement age?
- Do you have any particular retirement goals (e.g. travel, funding grandchildren’s private schooling)?
- Taking inflation into account, as well as household bills and outgoings besides a mortgage, is it realistic to solely rely on the State pension?
If any of these factors seem like they could cost more than what you will receive from the State pension, it’s worthwhile exploring your private pension options sooner than later.
Mistake #5: Not having the most appropriate pension plan in place
Possibly the biggest pension mistake of all is not having your pension work hard enough for you. You could have multiple pension pots from various companies that you’ve worked for over your career. These old pensions are simply standing still – not gathering any further interest over time. By consolidating multiple pension funds under one umbrella (i.e. a Private Retirement Bond) you can gain a much higher return over time.
It’s vital for you to understand all of your options when it comes to your pension and not assume that it will be sufficiently funded by the time you reach retirement. Granted, it’s not the most exciting process, but by being proactive about your pension with the help of a qualified financial advisor, you can be safe in the knowledge that you are maximising your pension’s potential.
Want to chat about your pension? We’re here to help! Book a free 15-minute discovery call with a member of the Elevate team and we will advise you of all of your pension options.