What are the biggest mistakes to avoid when it comes to your pension?
All too often I’m immersed in the reality that so very many individuals I work with are putting planning for their financial future on the back burner. Tantamount to financial planning is making sufficient provision for retirement and managing your pension fund effectively. The simple, glaringly obvious fact is that an abundance of people are facing a significant shortfall in their retirement income. It is essential to start saving for retirement early enough. And whilst many feel that they have this under control, it is hugely important to have an understanding of how your pension is actually working. What is it likely to be worth when you retire? Are there any death benefits before retirement? Will your spouse be eligible to your pension? Be honest with yourself. Do you really know the answers? Below are some of the common mistakes to avoid when it comes to pension provision:
Not having a pension at all
State Pensions are low and as an example the basic UK state pension is currently just £110.15 a week. That’s just £5,722 per year. I don’t know many people that could survive on that! It is absolutely imperative that each and every one of us makes our own provisions in retirement aside from a possible State pension. We have all heard the stories about the elderly couple that cant afford their heating bill. This is really happening and the simple fact is that so many did not adequately consider how they would fund their later years. People are living longer. Imagine retiring at 65 and living till the age of 90 with absolutely no income being generated. That is 25 years you will have to fund!
Not realizing how much you really need for a comfortable retirement
We are living longer, often remaining healthy for longer and an active retirement costs money. In 1991 half of American workers planned to retire before the age of 65. Today, that number is just 23%. The End of Service Gratuity payable to employees in the UAE, whilst certainly useful, is not adequate replacement for real investment for your future. Large sums are required to generate a decent level of income, particularly when you take into consideration inflation and your true purchasing power. Accumulating enough capital is of course achievable if you start soon enough and plan properly.
Making the mistake that your pension will come from your home
There is a common sentiment that I hear all too often: “My home is my pension” But let us look at the facts. Is this really true? We all need somewhere to live and even if you are lucky enough to pay off your mortgage, one of the biggest debts you will ever have. The likelihood is that you will still have to reside in that home. Typically this statement is really just an excuse to avoid making real retirement provision. Yes you may benefit from some growth in the value of your home, but this will be relative and in order to see any substantial increase this will only ever occur over the longer term.
Delaying your pension saving
The sooner you start saving into a pension fund the better. They say on average it takes 40 years to save any sort of decent pension pot. Research by the UK insurance company Legal & General reveals that to achieve an annual pension income of: £10,000 by the age of 65:
- If you start saving at the age of 25 you would need to save £105 each month.
- If you leave it until you’re 35, you will have to find £195 a month
- If you leave it until 45, you will have to save £405 a month;
- If you wait until you’re 55 you will have to find a whopping £1,100 a month.
What you have in your retirement pot when you do come to retire will ultimately depend on how much you saved and how long you saved for. Let’s say you are 40 years of age and you plan to retire at age 65. The stark reality is you only have 300 pay- days to accumulate enough wealth. When do you think you should have started saving?
Failing to review your pension provision regularly
Do you know how much your pension is worth? Do you know how many you have or who they are administered by? How about the type of funds they’re invested in or how much risk is involved?
If the answer to any of these questions is no, you need to find out. It is imperative that you ensure your pension is on track to grow enough to support you in retirement. Are the funds you are invested in too high risk? It may be that you are soon to retire and therefore your investments should be moved to low risk areas. Furthermore pension administrators change all of the time. If you don’t know who administers your pension it is highly unlikely you are receiving regular statements so how will you know how much your pension is even worth?
Individuals get nervous in a bad market
There is a saying… “ It is about time in the markets, not timing the markets”. When stock markets fall and the economy falters, many investors get nervous. Some decide to stop contributing to their investments or pension in case the value of the funds they are invested in fall. Pension provision is considered long term saving and tends to be across equity markets. Markets will go up and down and no one truly has a crystal ball but in actual fact when unit prices drop savers are benefiting from lower costs, which ultimately means they make a greater gain when markets rise again.
What are the tax implications?
Whilst you may not have access to home country pension plans with tax incentives for contributions, As an expat most of us can now invest in plans and funds without any tax deductions on growth. But it is important to ensure that your savings plan won’t leave you with a tax liability if you repatriate. Furthermore alternative offshore pension plans may have tax mitigating routes, which should be discussed carefully with your adviser
Make sure you seek the best advice
Be wary where you get your advice, Pensions and retirement planning can be very complicated areas. Many of you will have heard about a SIPP or a QROP’s. These are regulated approved schemes but which one is most suitable for you and your family needs to be taken into careful consideration. Will there be tax to pay on your pension? Are you sure you have considered the best route for succession planning? A good adviser will take time to explore every angle. Taking great care in understanding how your current provisions work whilst undertaking technical research in order to determine what is the very best course of action you should take.
Quite rightly, everyone wants to live a comfortable and even fruitful retirement. By ensuring you have the best understanding of your current provisions and the options available to you now and in the future will certainly help put you on course to achieving this.
Jessica Cook is a well established and respected Private Client Adviser based in Dubai. Having had a diverse career, she obtained a law degree and began work for a large legal practice biased in London, where she specialized in Criminal Law and Family Law. Jessica then went on to spend 7 years working for the Financial Times in London. With a wealth of knowledge and experience behind her, Jessica now believes she has finally found her passion in the world of finance and runs a successful financial advisory practice based in the UAE.