Pension mistakes and how to avoid them

Everybody makes mistakes in life – and pensions are no exception. The only difference is you could pay much more – and over a longer time – for pension mistakes than any other. Why? The latest life expectancy figures reveal 65-year old pensioners today are expected to live off their pension for an average of 21 years (men) and 24 years (woman) – nearly a quarter of their whole life! The younger you are today, the longer you’re expected to live, and the more pension mistakes cold cost you.

As an independent financial adviser, here are some typical mistakes that I see people making regarding their retirement…

1. Delaying saving – quite simply, the longer you delay, the more it costs you to build a good-sized pension. This is because of ‘compound interest’, which Albert Einstein called “the most powerful force in the universe”.

What’s the difference if you start contributing at age 16, 30, 40 or 50? Roughly speaking, every ten-year delay wipes out half of your funds potential growth.

Everything being equal, the earlier you start saving, the more potential your pension fund has to grow.

2. Not checking your pension pot – If you have a pension have you ever reviewed it? Many people don’t. Moreover, recent research revealed many of those who did review their pension, alarmingly, could not remember the investment options they have chosen.

Yet, not all investments are the same. Even a seemingly small difference in performance could have a significant impact on the size of your pot.

A 35-year-old male with a $20,000 pension pot could have a fund worth $55,120 at 65 if his investments grew by 5% a year. His fund might be worth $97,080 at 65 if his investments grew at 7% a year or 169,210 if they grew at 9% a year (assuming in all cases an annual fund management fee of 1.5%). Obviously these are just projections and investments will not always go up in value, they can also go down, so you could get back less than you invested.

However, if time is spent in the financial markets in a disciplined way then you stand more chance of having a comfortable retirement and it is the difference of retiring as an old age pensioner or as a retired gentleman. The choice is yours to make.

3. Not checking if you’re getting good value for money – most people know how much they pay for their mobile phone, but not for their pension. Nor do they know what they’re paying for.

The charges you pay typically buy you the services of your pension provider and the expertise of a fund manager who looks after your investments. In addition some people employ a financial adviser to make recommendations.

The services you get from your pension provider vary in depth and quality. Things you might (or might not) get include:

Efficient administration

Good customer service

A good telephone helpline in your home country language; Quick response times for instructions and enquiries; Online access to your pension; Online planning tools including calculators and portfolio analysis; Clear, concise information Pension and Investment Research

4. Relying on property – if you decide to just use property as a retirement fund, you could be putting all your eggs in one basket.

Investment professionals agree diversification is key to managing risk, although it doesn’t guarantee against loss. So, if you already have capital invested in property, doesn’t it make sense to consider diversifying and investing in different asset classes?

What’s more, the property market isn’t exactly “safe as houses”, as people who had to sell their homes in 2008 and 2009 will testify.

5. Relying on Inheritance – Common sense highlights the first problem with inheritances: you can’t be sure when you’ll benefit from the windfall.. The way life expectancy is shaping up; older generations are likely to live well into their retirement years. Moreover, the amount you end up inheriting may be far less than you expect!

If you do not currently contribute into a retirement vehicle I would seriously suggest speaking with your financial adviser and begin the process of setting something up. Otherwise, you may not be able to enjoy even half the lifestyle you currently maintain and that is a scary prospect.

Rupert Connor is senior consultant at Acuma Independent Financial Advice. Views expressed here are his own.