The top five worst pension mistakes!

These five common pension mistakes will cost you thousands! Find out how to avoid them.

When it comes to preparing for your retirement, what's the worst thing you can do?

Absolutely nothing.

Believe me, this is one sure fire way of leaving yourself high and dry when you retire.

Even if you have already set up your pension, things can still go wrong, putting your lifestyle in retirement at risk. So, how do you keep yourself on the right track? Well, I think you can make a start by steering clear of these five big pension mistakes:

1. Starting too late

I know you've heard it all before, but it really is true the sooner you start your pension the better. After all, pensions love nothing more than years and years to grow in value. Maybe you've been putting your pension off because it just doesn't seem affordable right now. But I think that's a decision you will live to regret.

Look at it this way: let's say you're 25 and you save £100 (gross) a month in a pension until you retire at 65. If your pension grows at 7% a year, your pot would be worth £96,268* after 40 years. But if you delay for ten years, your pension would only be worth £46,371*.

In other words, by putting in an extra £12,000 between the ages of 25 and 35, you've gained an extra £50K in your pension pot. So you've effectively doubled the size of your pot, simply by giving it an extra 10 years to grow.  

Even if you can only afford say, £20 a month at the moment, it's a start which you can build on as your finances improve over time.

2. No top-ups

There's really very little point in going to the trouble of opening a pension unless you plan to pay as much into it as you can afford. As a general rule of thumb, you should aim to save half your age as a percentage of your salary. That means if you're 30 you should try to save at least 15 per cent of your earnings in a pension.

If that sounds like a tall order, start to treat your pension just like any another household bill. Set up a monthly direct debit payment into your pension pot for the maximum amount you can manage. Make sure the money leaves your current account as soon as your salary arrives. After a while you probably won't even notice it.

3. Rejecting employer contributions

These days it's quite common for your employer to pay into a pension scheme on your behalf. But the trouble is to benefit from this free money you normally have to pay something into the pension yourself as well.

It amazes me how many people turn down employer contributions simply because they don't want to make an ongoing financial commitment themselves.

But I think that's a huge mistake. Let's say your employer is willing to match the amount you save in your pension every month. If you save £100, your employer will also contribute £100. You'll also get tax relief of £25 on your own contribution (assuming you're a basic rate taxpayer and you qualify for 20% tax relief on your pension contributions).

That means £225 will be invested in your pension pot every month, even though you only pay £100 out of your own pocket. Now it really would be a slip up to miss an opportunity like that.

4. Forgetting about inflation

If you have been carefully squirreling away in your pension every single month, don't forget the amount you invest today won't be worth anywhere near as much in twenty or thirty year's time. So, you'll need to increase your contributions in line with inflation.

If you always stick to the rule I mentioned earlier of investing half your age as a percentage of your earnings, it should help to inflation-proof the value of your pension contributions over time, and give you the best possible chance of generating a healthy pension pot.

5. Ignoring poor performance

Finally, you really don't want all your hard saving to go to waste simply because you left your money to languish in a poor performing pension fund. To make sure your retirement planning stays on the right track, you should ideally review your pension arrangements at least once a year.

If you find that it hasn't done well, don't forget you always have the right to transfer it to a new pension provider if necessary. But you do need to check you won't be hit with heavy exit penalties or lose valuable benefits when you move the scheme.

Take a look at Why you should transfer your pension for the full lowdown of everything you need to think about before you take the plunge.

*Assumptions: Pension fund grows at 7% p.a. An annual charge of 1% is deducted. The fund value takes inflation into account at a rate of 2.5% p.a. Contributions increase in line with inflation at a rate of 2.5% p.a.

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