Avoid these 3 pension pitfalls

1st October 2015

Pension planning isn’t everyone’s favourite topic of financial conversation, particularly if your retirement is a distant prospect.

It’s much easier, because of the immediacy of your financial goal, to save for a deposit for a house or a new car or holiday.

That’s human nature, but the stark reality is that the earlier you start saving for your retirement, the better.

If you’re in your twenties, thirties or forties, it’s easy to put off starting a pension. Many justify this decision to themselves, and their loved ones, by talking about alternative plans for their retirement.

Sadly, falling into this trap can often be a recipe for poverty in retirement. Here are three common pension pitfalls that everyone should avoid:

1) “I’ll be fine, I’ll just rely on the state pension”

Relying purely on the state pension is highly unlikely to give you your desired retirement lifestyle.

April 2016 will see the introduction of a flat-rate, single-tier state pension with a full level of £155.65, but there will be many other reforms and reinventions by the time today’s young workers retire.

Tellingly, a recent survey found that nearly half (40%) of young Britons think the state pension will no longer exist in 2050.

If you’re planning to depend on the state in your old age, it would probably be wise to think again.

2) “Don’t worry, property is my pension”

With house prices continuing their long-term upward trajectory (particularly in London) it’s tempting to see your property as a replacement for a pension pot.

The temptation is particularly strong if you’re one of a growing number of buy-to-let investors.

Don’t be fooled, though. Houses can go down as well as up in value and the financial crisis of 2007-08 offered a stark reminder of the perils of relying on an ever-growing economy.

3) “It’s OK, I was automatically enrolled into a pension scheme”

One of the biggest risks associated with the recent introduction of auto-enrolment workplace pensions is that they lull workers into a false sense of security over their retirement savings. The total minimum contribution currently stands at just 2% (1% from the employer and 1% from the employee). This will increase gradually over time but even so such schemes should not be seen as a solution in their own right.