Posted / October 10, 2019
By Martin Harris, Head of Advice
Having money left over before the next pay day is challenging enough, never mind thinking about what will happen when we reach pensionable age and exploring the myriad types of pension, some of which seem designed to confuse. Far from being king, cash is almost guaranteed to depreciate in value by the time we really need it, so MyEva is on a mission to cut through the jargon, scare-mongering and news of corrupt fund managers, all of which deter people from exploring alternative options.
Whether you are at the beginning of your retirement planning, or feel you’ve at least made a strong start, here is a checklist (much like the one you will go through when you download MyEva) of potential pension pitfalls and how to steer clear:
‘Forgetting’ which work pension schemes you’ve paid into:
There are pots of unclaimed pension money languishing across the UK, because their rightful beneficiaries have simply forgotten that they exist! Research shows that there are *£400 million worth of funds that have been ignored by retirees, who haven’t made a note of all the workplace schemes they contributed to over the years.
With The Independent reporting on a Deloitte study that found “Nearly half of Millenials plan to leave a job within two years,” trends suggest you could pay in substantial amounts without ever seeing a penny back, unless you create a system for tracking important financial details.
Whether it be in an Excel spreadsheet, well-organised box files (that have been backed-up digitally), or in an app like Evernote which you can access online, store your pension enrolment letter and any related log in details as soon as your receive them.
Your loved ones should also be able to access the list of pension pots in case of emergency.
Finally, use the Government’s pension tracker to check you haven’t forgotten any. This tool can help you locate pots using a few basic personal details and the name of the places you’ve worked.
Assuming you are eligible for a standard state pension:
A sad reality is, some people will not qualify for a state pension at all, if they’ve failed to make National Insurance contributions for at least 10 years. This could happen to housewives or house husbands, those who haven’t worked or claimed certain benefits due to illness, a long spell abroad or ‘off the books’ self-employment and even lottery winners or trust fund recipients who burn through their fortunes over time.
If you do qualify, which most people will, the amount of money you’re awarded will still depend upon how many years you’ve paid into the system, so check your personal State Pension forecast via HMRC’s dedicated portal.
Spontaneously drawing down your lump sum:
As tempting as that birthday cruise may be, accessing a lump sum from your pension early will greatly reduce its value. As Which? rightly states, “In normal circumstances, no you can’t withdraw any of your pension before the age of 55 – without paying a huge tax penalty. Any pension savings withdrawn before the age of 55 are subject to a huge 55% tax.”
A 55% tax is surely enough reason to hang on in there. If that doesn’t deter you, think of the lost opportunity to watch your money grow for a few extra years, leaving you with potentially much more to spend.
Losing money in a scam or poorly-managed fund:
Disappointed families who have been left with nothing in their latter years are being featured on our TV screens with increasing frequency, their tales of lost money and a lifetime of work down the pan serving as stark warnings. To my knowledge, greed and carelessness are seldom at the root of horror stories like these.
Rather, factors including unscrupulous ‘snake oil’ salesmen who convince well-meaning investors of the ability to get abnormally high returns from (delete as applicable) an off-plan luxury flat that never gets built/extortionate hidden fees/an inexperienced, albeit self-confident fund manager with a high risk appetite/an unproven tech or crypto company with a new and complicated concept…and so the list goes on.
The FCA is responsible for regulating financial services providers in the UK and has put together a collection of ‘ScamSmart’ resources, which includes a list of warning signs and ways to avoid being conned.
Failing to pass money on to family:
One of the most useful things on MyEva’s checklist, in my opinion, is the reminder to arrange for a loved one to receive your pension, should you pass away before them.
Your provider should make this easy to do and you can often nominate beneficiaries online, or by scanning over a simple form. If you don’t nominate someone before you pass away, the pension fund’s trustees will decide who should get your money after your death. In complicated family situations, the money could end-up going to an estranged ex-spouse or a relative you haven’t spoken to for years, should they be identified as technically your next-of-kin.
Not shopping around:
Comparing different funds, even if they’ve been selected by your employer, is always sensible. Pension firms, along with providers of other personal finance products, must, by law, provide a ‘key facts document’ which lays out all the pertinent information which can help you narrow down potentials before combing through all of the small print. Watch out for the amount of money that may be deducted due to management fees and penalties.