When it comes to pensions, minor missteps or oversights can have a considerable effect on your long-term savings.
Due to the benefits of compound returns, missing just a few months, let alone years, of pension contributions can significantly reduce the growth of your retirement fund.
The good news is that the reverse is also true. By making additional contributions to compensate for lost time, you can boost your retirement fund and potentially offset earlier gaps in saving.
Even small, regular contributions can accumulate over time, helping to strengthen your financial future and secure a more comfortable retirement.
Read on to discover five common mistakes that could cause you to lose up to £300,000 of your pension.
1. Starting your pension at 35 instead of 25
Starting a pension at 35 instead of 25 could significantly reduce your retirement savings.
A study reported in insurance Edge found that missing this decade of savings could leave you with a pot of £500,000 instead of £800,000.
Early pension contributions can significantly boost your retirement savings due to the growth potential of compound returns – often referred to as the “eighth wonder of the world”.
Compounding entails generating returns on both your initial investment but also on the accumulated returns from previous periods.
Over long time horizons – such as your entire working life – compound returns can help transform even modest contributions into a substantial retirement nest egg.
So, it is a good idea to start saving into a pension scheme as early as possible, or to make additional contributions if there were years you missed in your early career.
2. Opting out of your pension
Opting out of a workplace pension for just five years could significantly reduce your retirement pot, no matter what age you are when you do it. However, the younger you are, the harsher the effect of opting out, again due to missing the benefits of compounding.
A study reported by Money Week found that if you opt out of your workplace pension scheme for five years between the ages of 55 and 60, you could reduce your retirement pot by £100,000. Missing five years of contributions between 35 and 40 could cost your pension £206,000.
Opting out may seem appealing in the short term, as it increases your take-home pay. However, doing so means you miss the valuable benefits of contributing to your pension, like Income Tax and National Insurance relief, employer contributions, and tax-efficient investment returns.
So, while the immediate appeal of opting out of your workplace pension scheme may seem enticing, it’s a good idea to consider the long-term effect of doing so before making such a decision.
3. Not making up for maternity leave or a career break
Whether for parental leave, travel, or caring responsibilities, breaks from work often mean reduced or paused pension contributions.
The report in Money Week found that taking a career break for just six months could reduce your pension pot by £30,000 or more.
While six months may not seem like a long time, it can have a considerable effect over the long term, unless you later make up for your missed contributions.
So, it’s a good idea to review your pension plan during such breaks and consider making additional contributions either now or in the future to offset potential losses.
4. Ignoring pensions on divorce
Overlooking pensions during a divorce settlement can leave one party with substantially more retirement income than the other.
After the family home, pensions are often the second largest asset you can have, making them crucial to consider when dividing your wealth during a divorce.
However, Which? reports that 71% of divorcing couples don’t include pensions in their settlement.
Women generally lose out in this situation. The Guardian reports that women’s private pension pots are typically worth 35% less than those of their male colleagues by the time they reach 55.
FTAdviser reports that divorcing women lose an average of £30,000 by overlooking pensions in their settlements.
Failing to account for this imbalance in your divorce proceedings could lead to long-term financial disadvantages.
So, it’s essential to ensure pensions are part of the conversation during a divorce to protect both parties’ financial futures.
5. Moving to part-time work
Transitioning to a three-day workweek for part of your career can also significantly reduce your pension savings.
A report in Pensions Age found that switching to a three-day week from the age of 35 could result in a total pot worth £119,000 less at 66 than if you remained working full-time.
While many factors might influence your decision to shift from full-time to part-time work, pensions often remain overlooked.
Since pension contributions are typically based on a percentage of your salary, a decrease in income leads to a proportional decline in contributions, which can substantially reduce your total pension pot at retirement.
A financial planner can help ensure your pension stays on track if you have missed contributions
As the examples above illustrate, it’s easy to overlook pension contributions at certain stages of life. However, even missing a few months can be significantly detrimental to your long-term savings.
If you’re worried about missing or missed pension contributions, a financial planner can help you get back on track and ensure you’re able to enjoy the retirement you deserve.
To speak to a financial planner, get in touch.
Email hello@solusfinancial.co.uk or call us on 01245 984546.
Approved by Best Practice IFA Group Limited on 18/10/2024.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.