Here are the top 3 pension mistakes I’ve seen other people make. Although they are UK specific, it might be relevant for readers elsewhere (I know I get plenty of readers from Australia and the United States).
1. Not auto-enrolling in a pension scheme
When I worked in the Probation Service, for a few years I was on the edge of the finance team. So in an open plan office you tend to hear a few things!
For a few years now in the UK, there has been a requirement for an employer to automatically enrol a new employee in their pension scheme, unless they specifically opted out. So you would think that if the default position was you would be enrolled into a gold-plated pension scheme, you would happily join it, wouldn’t you?
Surprisingly there was a significant number of new employees who would opted out, quite a high percentage. That always puzzled me. Why not join a final salary salary pension, or more recently, a defined benefits pension? Which ever scheme, there were considerable Government backed benefits.
Apparently people couldn’t afford it. Sure it did cost a small percentage of the monthly salary but it was tiny, plus the employer would also contribute to the pension. There are so many benefits of a local government or a civil service pension, it’s hard to believe some people still opted out.
Astonishing.
2. Not paying into an additional pension
In the UK we get tax relief on anything paid into a private pension (or Additional Voluntary Contributions – AVCs). So if you pay income tax at the basic rate of 20%, the Government adds 20%. If you are a higher earner and pay 40% tax, the Government matches this.
Where else will you get this kind of return? Then think COMPOUND INTEREST.
3. Not knowing about a National Insurance shortfall
In the UK everyone should know that we have to pay National Insurance (NI) in order to build up our state pension. Sure if you’re not working for a specific reason, you can claim credits so a short fall is prevented.
I understand self employed people are vulnerable to missing payments or having gaps in their contributions. The good news is you can buy extra years but it needs to be done fairly promptly – you can’t fill a 20 year old gap just before you hope to retire.
As I have retired early, I know that I will need to make some payments to ensure I get a full state pension (note to self….)
And 4. Couples not balancing their pensions
This is an additional mistake which came to mind after I had posted the three mistakes. This final mistake is one that applies to at least one couple we are friendly with.
The situation is with a married couple. The husband has always worked full time, his wife works part time and has an employment history interspersed by having children. They freely admitted that they will rely on HIS pension in retirement.
What if he dies first? Will his work place pension provide for his wife and if so, will it be sufficient? The worse case scenario is that she has no pension, other than her state pension. So their retirement pension income is not anywhere near a 50-50 split, probably 80-20 at a guess. They know this is an issue and we understand they could be taking steps to address this.
We have considered this ourselves, in the context of financial planning many years ago. We are thinking that we need to review the situation, just to make sure everything remains as planned – roughly 50-50 (perhaps 55-45 which is broadly okay). It should be okay but we just want to check this.
I am not qualified to comment on above, but makes sense… but check it out with a professional….
I have a plan that means I can retired at 50 years, in 3 years time, and not work at all, however following lasts weeks post I won’t be doing that that for three reasons,
1. I love what I do in the charity sector, everyone I help with my volunteering team 1,000 of people lives in mental health, reducing loneliness in over 75 yrs and so in depending where I work Red Cross, Cardiology, keech hospice YMCA etc.
2 I can make that impact as a volunteer but can work x3 days and be an artist for two days, to use my project management skills to make a real difference, not blowing own trumpet, the lottery, funders and NHS gives me thousands of pounds to spend to achieve this, and we evaluate it to see distance travelled……
3. I will then pay tax for 20 odd more years, which pays for pension, NHS, social care, etc etc, which I will need but so will you.
4. As a manager of 20 years experience I am passionate about training the next generation like our pastor Mark does to young new pastors, I can’t do that in retirement in the same way as I do every day as a manager who takes a Jesus servant hearted model of leadership ie train your disciples, die and build a church…. nit planning to die anytime soon, but won’t be here for ever! Who trains the snowflakes 20’s if too many step aside at 50
No disrespect to you Doug I love it that retired early and have time to mend my bike etc, because you do the above by writing blogs, and volunteering etc and so does Rachel but not everyone has your skills, so take it as a praise.
So whilst I won’t be working until I am Joe Biden’s age, we don’t get great leaders and presidents overnight, Joe is experienced as is Angela M, Winston Churchill etc because they have done the long game….
So do I agree with last week’s blog, yes and no, do what works for you and your family situation, financial situation and mental and physical health, work as long as want or have something to offer….. but retire or go part time so young folk get opportunities if it’s right for you, no one size fits all, which I think is what you said Doug.
Sorry this is long, but it’s my musing on a subject I have been praying about for the last year whilst on sabbatical
Many thanks Jo, I’ve not edited your comment in anyway.
It is always great hearing your view of things!
An important point, which perhaps I’ve not made strongly enough, is to say that when a person’s salaried career comes to an end and they retire, it doesn’t mean they should retire from “life”. While you are right about training your successor while still in the workplace, being retired opens up far more opportunities and freedoms. Now obviously those freedoms can be used well, or abused.
As this post is about funding pensions, I’m very glad to read you have made provision for your own retirement and it’s really great that you will have the choice when you get to that stage.