Want to get the most from your pension? Avoid these 5 costly mistakes

Ensuring you have enough saved in your pension to retire at your chosen age and with your desired lifestyle is one of the main goals of financial planning. One of the most powerful tools in achieving this objective is compounding.

Compounding entails generating returns on both your initial investment and the accumulated returns from previous periods. Because of its ability to deliver substantial returns in the long term – often exceeding the initial investment – compounding is sometimes referred to as “the eighth wonder of the world.”

However, this means that even a short gap in your pension contributions can significantly impact the long-term growth potential of your fund.

Thankfully, the reverse is also true. By increasing your contributions, you can help counteract past mistakes and get your retirement fund back on track.

Read on to learn about five costly mistakes to avoid to ensure you get the most from your pension.

1. Missing the first decade of your working life

Many people think that the pension contributions they make when they are young are insignificant as their earnings are usually considerably lower than they are later in their careers.

However, the power of compounding means that early contributions can make a significant difference to your retirement savings.

A study reported in Insurance Edge found that starting a pension at 35 instead of 25 could result in a retirement fund of £500,000 rather than £800,000 – of course, the difference could be bigger or smaller depending on how much you earned in those years. If you were to access your pension for 20 years, that £300,000 difference would equate to £15,000 a year.

Over the course of your working life, even small contributions can grow substantially, turning modest savings into a sizeable retirement fund.

So, it’s a good idea to start saving into a pension as early as possible. If you missed contributions at the start of your career you may want to make additional payments later to help bridge the gap.

2. Choosing to opt out of a workplace pension

While opting out of a workplace pension means your take-home pay will increase, it also means losing out on valuable benefits, including Income Tax and National Insurance relief, employer contributions, and tax-efficient investment growth.

Even just a five-year gap in contributions can significantly reduce your retirement savings. According to a MoneyWeek report, opting out between the ages of 55 and 60 would reduce the average pension pot by £100,000. Doing so between 35 and 40 could cost you £206,000 in retirement savings.

So, though it might seem tempting in the short term, opting out of a workplace pension could have long-term ramifications on your financial stability.

3. Not making additional contributions to cover maternity leave or a career break

Whether for parental leave, travel, or caregiving, taking a break from work often means reducing or pausing your pension contributions. 

While a short break may not seem significant, it can have a lasting impact on your retirement savings – unless you compensate for the missed contributions later.

Indeed, the report in MoneyWeek found that even a six-month career break could shrink your pension by £30,000 or more. 

So, if you've taken time away from work, regardless of the duration, it may be worth considering additional contributions to help make up the difference.

4. Moving to part-time work and reducing your contributions

As you usually pay into your pension as a percentage of your salary, reducing your income by moving to part-time work will likely mean you also lower your contributions. This could potentially lead to you having a significantly smaller pension when you reach retirement.

A PensionsAge report found that a 22-year-old employee earning £25,000 could have £119,000 less in their pension by age 66 if they switched to a three-day workweek from age 35 compared to staying full-time.

While there are many reasons to move from full-time to part-time work, pensions are often overlooked in the decision-making process. Considering the long-term effect on your retirement savings can help you plan more efficiently for the future.

5. Not including pensions in a divorce settlement

After the family home, pensions are often one of the most valuable assets you can own, making them a crucial factor to include (or at least consider) in a divorce settlement.

However, a Which? report found that 71% of divorcing couples don’t include their pensions as part of their settlement. This means the party with a smaller pension will likely have a significant financial disadvantage in retirement.

Women are particularly affected by this oversight, as they are more likely to have smaller pensions. According to FTAdviser, divorcing women lose an average of £30,000 by overlooking pensions in a divorce.

Ignoring this imbalance can have long-term financial consequences, so it’s important to ensure pensions are part of the discussion during a divorce to protect both parties' financial futures.

A financial planner can help you get your pension back on track if you’ve missed contributions

While it's easy to overlook pension contributions during certain life stages, even a few missed months can have a considerable effect on your long-term savings.

If you're concerned about missed contributions, a financial planner can help you get back on track and make sure you're set to enjoy the retirement you deserve.

To speak to a financial planner, get in touch.

Email info@mlpwealth.co.uk or call us on 020 8296 1799.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.

The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.