5 pension mistakes to avoid

National Pension Awareness Week runs from 11th-15th September 2023. Pensions are the foundation of retirement planning but are unfortunately one of the least understood financial products as education in the UK is often limited. Consequently, many pension savers risk making costly errors with their funds.

In this article, Carpenter Box Financial Advisers outlines five common pension mistakes that you should avoid.

1 – Relying on “default” investments

Your workplace pension scheme will have a default investment option that all new scheme members will be invested in. This middle-risk investment option may not be the best option for your pension savings, may not invest in the things you care about, and may impact the final value of your pension. Reviewing your default investments and looking at alternative options is often a good idea.

2 – Under saving

Individuals often under-appreciate the pension value they require to live the retirement they dream of. Although Auto-Enrolment legislation has had a positive impact on encouraging pension saving, people often stick to the minimum contribution levels throughout their careers. Increasing your contributions slightly, particularly early in your career, can have a massive impact on the final value of your pension.

3 – Losing pensions

Almost £26.6 billion worth of pensions are not currently matched to their owners with lost pension pots averaging £9,470.

It is increasingly uncommon for people to stay with one employer throughout their working lives. Each time you change employer you will be enrolled into a new pension with that employer. If you change jobs frequently and regularly move around for work, your old pension providers may lose track of you. Therefore, you should keep a record of your different pensions (providers and plan numbers) and seek to keep your address updated with all of them.

If you think you may have a dormant pension plan, the good news is that it’s fairly straightforward to track them down. With your National Insurance Number, the names and addresses of your previous employers and the use of the Government’s Pension Tracing Service you should be able to find out everything you need to know.

Having found old pension plans, you might be tempted to move older pension plans into your current workplace pension scheme. Whilst this might be the right decision for some, it is important to consider that some older workplace pensions may have valuable benefits which could potentially be lost upon transfer.

Tracking down any old pensions, consolidating them into one plan (if that benefits you) and keeping a regular eye on where you are with your retirement savings could help give you peace of mind about your financial future.

4 – Pension scams

Unfortunately, pensions can also be lost due to scams. Pension scams have been on the rise since the pension freedoms were introduced in 2015. Anyone could be the target of the scam, and the impact on your life and retirement plans can be catastrophic.

Falling for pension scams can often be an isolating and scary experience but keeping up to date on the latest scams can help mitigate this. Whether you have already retired, or your retirement is still some years off, knowing how to protect your money can save you a lot of potential heartache.

Types of pensions scams include:

Free pension review: It is often said “You get what you pay for”, that’s why it’s important to be cautious with businesses that offer free pension reviews. Often, they’re incentivised in other ways, whether through high fees or recommending unsuitable companies for a commission.

Early withdrawal: Unless you are in poor health, you cannot take your pension until you are 55 (57 from 2028). Scammers usually offer ‘liberation’ or ‘loans’ that allow you to borrow from your pension. The funds will be transferred into a scheme controlled by the scammer. They may charge an initial fee of as much as 30%. After fees and tax, the remaining money will then be invested in high-risk products or just stolen.

Defined benefit Transfer / Quick cash: This is unfortunately one of the most common pension scams of recent times due to it being legal. Firms encourage clients to transfer their lucrative defined benefit schemes for a relatively smaller lump sum.

Alternative investment: Like the free pension review, the seller will encourage you to invest in ‘high return’ or ‘exotic’ (risky) investments. In return, the seller will receive a commission or be behind the company being invested in.

Multi-company fee: Your funds will be passed through a network of managers each taking a fee.

Signs that something could be a scam include unsolicited messages (cold calling), pressure to act quickly or the use of phrases such as ‘pension liberation’, ‘high returns’, ‘loophole’ and ‘savings advance’.

If you are worried about a potential scam or may have been contacted by a fraudster, contact the financial services regulator (FCA) on
0800 111 6768 or visit their website www.fca.org.uk.

5 – Going it alone

Pensions can be complex financial products. People often tackle pensions without seeking advice or guidance. However, there are numerous sources of information available, such as Pension Wise (the Government’s free pension help scheme for those over 50s). Or you can speak to a qualified financial adviser to help prevent making these pension mistakes.

If you would like to discuss your pensions and retirement planning, please don’t hesitate to contact one of our Independent Financial Advisers. Call our team on 01903 534 587 or visit www.carpenterboxfa.com/retirement for further information.