Inflation: Price to be paid says expert
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With markets being so unsteady at the moment, many people may consider making some changes to their pensions as they believe they are losing money, however, this may be one of the most costly things to do. David Gibb, chartered financial planner at Quilter, spoke exclusively with Express.co.uk about little-known mistakes that can cost people thousands in retirement. As a financial planner, Mr Gibb works with many different portfolios and has seen small mistakes that can cause greater trouble which he listed below.
Forgetting about the MPAA
Over the last few years, the number of flexible withdrawals from pensions has risen, and more recently there has been a significant spike as people are facing rising energy bills and food costs.
Given everyday costs are expected to soar further still, particularly alongside increasing mortgage payments, many pensioners may feel they need more each month to get by.
Mr Gibb said: “If you feel that you have no other option than to take income flexibly now, you must be aware that this could also limit your ability to save again in the future. The Money Purchase Annual Allowance will cap future contributions at just £4,000 per year, rather than the normal £40,000.
“So, if you take income now but then later return to work, you might not be able to make full pension contributions to rebuild your pension savings.
“There is a risk of a scarring effect on people’s savings, caused by them being forced to tap into their retirement pot early, but then also being prevented from recovering that funding gap when their finances are in a better shape.”
Accessing pensions earlier than necessary
He continued: “Taking proper account of the impact of early withdrawals on the longevity of your pension pot is paramount. Accessing your pension a few years earlier than planned can trigger a ripple effect into the future which means you may need to re-adjust your future plans depending on what actions you take now.
“While the cost of living crisis may force your hand, it is important to tread carefully when accessing your pension and seek professional financial advice where possible.”
Not checking state pension forecast
Mr Gibb suggested that people should not rely solely on the state pension. However, it can still provide a significant source of income for many retirees. If someone is nearing retirement, they should check their state pension forecast.
This will help them understand how much state pension they could get, when they can get it, and if there are any gaps.
If someone is not on track to receive the full amount, it may be worth considering topping up any gaps.
Not opting back in
He said: “If you have previously chosen to opt out of auto-enrolment, it would be wise to reconsider as you are likely missing out on valuable retirement benefits.
“Not only would you be missing out on your own savings towards your retirement, but you would also lose generous employer contributions.”
Mr Gibb explained when saving into a pension pot, people receive tax relief. If they have opted out, more of their money will be going to the government as tax as opposed to being saved into their own pension pot.
Not speaking to one’s employer
Additionally, he suggested people speak to their employer and ask if they offer salary exchange, which can help boost pension savings by making the contributions pre-tax and National Insurance.
Where possible, people should make full use of employer contributions. It is worth exploring whether their employer offers matching contributions over and above the auto-enrolment minimums, as this could make a considerable difference to their pension pot.
Not being aware of how a pension is invested
Mr Gibb said: “Many people save only the minimum amount into a default fund, but you are unlikely to achieve the best possible returns on your investment if you take this approach.
“It is a good idea to pay more than the minimum amount required into your pension to ensure you are able to build up a substantial pot to support the retirement you would like to have. Additionally, you can benefit from tax relief on pension contributions up to the annual allowance of £40,000 (this tax year).
“Many people are unaware of how their pensions are invested and while it may be easy to remain in the default fund, performance can vary substantially across different investments.
“Even a small difference could significantly increase the size of your pension pot, so it is a good idea to make sure you understand where your money is invested.
“This is to ensure it is in the right fund for you. If possible, you should seek financial advice to ensure you are making the best possible decisions for your personal circumstances and retirement plans.”
With investing comes risk.
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