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Common pension mistakes to avoid
Posted on: 14th Aug 2023 by: CamOuse Financial Management Limited
If you’re to enjoy the lifestyle you want and deserve in retirement, careful planning is critically important.
After all, you’re not out to simply make ends meet. After decades of hard work, you want to have a sense of financial freedom, and fill your time with your hobbies, passions and priorities.
But many of us can make mistakes without realising it that can significantly hit our income in later life.
We thought it useful to highlight a few of the most common pitfalls that you should avoid…
Delaying your pension saving
Starting early is the best thing you can do when it comes to saving for retirement, as you have longer to build up your pension pot and benefit from more compound interest.
So don’t procrastinate. Even just a small amount can blossom into a much larger sum over time.
Not saving enough
What are your goals for retirement? Are you saving enough to achieve them?
It can be tempting to just put the bare minimum in your pension, but if you make insufficient contributions as the years pass, you might find you don’t have enough to enjoy the comfortable retirement you deserve.
Opting out of your workplace pension
If you’re not enrolled into your workplace pension, then you’re missing out on employer contributions, which is effectively free money.
Relying solely on the state pension
While the state pension provides a valuable safety net for retirement, it won’t be enough to ensure the standard of living you desire in later life. It’s therefore really important to make sure you have personal pension savings in place so you can be certain of financial security and a decent quality of life.
Dipping into your pension savings before retirement
If you’re under financial pressure, it might be tempting to access your pension pot to tide you over.
But this can lead to you paying more income tax and losing some of your tax-free allowance, as well as reducing your retirement income in the future.
Instead, you should set up a completely separate emergency fund, so you can be prepared if a difficult situation arises, without jeopardising your future.
Not thinking about pension fees and charges
Different pension providers will have their own fee structures, so it’s well worth looking for options that are transparent, competitive and don’t erode your savings as the years pass.
Losing track of old pensions
As you move from one job to the next, you can pick up multiple workplace pensions. It’s therefore very important to make sure you know where these old pots are, and perhaps consolidate them into a single scheme so it’s easier to manage.
Ignoring pension statements
It’s really easy to ignore financial documents when they drop through your letterbox, so make sure you actually read them and understand what they say.
Not reviewing your investment strategy
Markets go up as well as down, and the level of risk you’re exposed to will inevitably change over time.
You should therefore review your investment strategy every few months, so you can make adjustments where necessary, minimise your risk exposure and capitalise on opportunities for growth.
It’s really important that you know what’s happening with your money and that you’re able to make informed decisions about planning for your future.
If you have any questions on preparing for retirement, it’s well worth speaking with a financial planner.
With the help of a regulated specialist in this area, you can take the right steps to ensure you’re able to enjoy a happy, fulfilling retirement.
Get in touch and we’ll be happy to speak with you.
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Understanding the true cost to your business
Pension arrangements must be available for all employees. There are three categories of employee:
Eligible
Aged between 22 and State Pension Age (SPA) with qualifying earnings over the Auto Enrolment earnings trigger
Non-eligible
Entitled
Important Notes
- Eligible jobholders must be auto-enrolled
- Non-eligible jobholders are allowed to be auto-enrolled if they want to
- Entitled workers are entitled to join a pension scheme, but the employer doesn't have to contribute
|
Qualifying Earnings lower threshold |
£5,772 |
|
Qualifying Earnings upper threshold |
£41,865 |
|
Automatic Enrolment earnings trigger |
£10,000 |
Minimum contribution level options:
|
8% of Qualifying Earnings of which |
3% is employer's (starting at 1%) |
|
9% of Basic Salary of which |
4% is employer's (starting at 2%) |
|
8% of Basic Salary of which |
3% is employer's (starting at 1%) |
|
(Where basic salary is at least 85% of total earnings) |
|
|
7% of gross earnings of which |
3% is employer's (starting at 1%) |
Pay reference period
Essentially the frequency that the jobholder is paid e.g. monthly, weekly etc. but with reference to the tax month, week etc. therefore it may not be the same as the payroll period.
Deduction and payment of contributions
It is the employer who is responsible to calculate, deduct and pay all contributions to the AE scheme. NOTE – the first and last contributions are likely to be for less than a full pay reference period and should be adjusted accordingly.
Payroll services
It can be seen that it is very important that the payroll system synchronises with the AE scheme otherwise the employer will not be carrying out all requirements and then penalties will be incurred.
Staging date
Based on the employer’s payroll size as at 1 April 2012 and can be found at www.thepensionsregulator.gov.uk/employers using your PAYE reference. The Qualifying Workplace Pension Scheme must be registered with The Pensions Regulator within 4 months of the staging date.
Compliance and communication
Postponement
Auto-Enrolment can be postponed for up to 3 months:
- For current eligible employees
- For workers that meet the criteria in the future for the first time e.g. avoid joining temporary or lower paid workers
Opt-Outs
All eligible employees must be auto-enrolled, but can, with the correct notification, opt-out within one month of joining the scheme and be treated as never having joined. They can opt back in and will automatically be auto-enrolled every 3 years in any case!
Communication
There is a wide range of information that must be provided to all employees at certain times, such as:
- The date auto-enrolment took place for eligible jobholders
- That non-eligible jobholders have the statutory right to opt in
- Entitled workers have the right to request the employer to enrol them into a pension scheme
Salary sacrifice
Contributions can be paid by effectively reducing salary, which saves on NI contributions, but employee must choose to do this – they cannot be forced, so a contractual variation will need to be implemented.
Default investment fund
Investment Options
All eligible employees will be automatically invested into a default investment fund, which is a balanced risk fund that is “life styled” to account for the employees approach to retirement. They also have the option to invest in a wide range of funds of their choosing.
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