Seven pension mistakes to avoid when you're aiming to build your pot

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By sidestepping seven common mistakes, you could take your pension planning to another level and reduce the risk of falling short of money later. We explain seven simple ways to pep up your pension pot – from getting a boost on your pension payments to using some great online tools. 

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1. DON’T turn down money from your employer

When offered the opportunity to join a workplace pension, it’s nearly always a good idea to do so. 

For most people, your employer must automatically enrol you in a workplace pension scheme (thanks to the ‘auto-enrolment’ rules). You may even be offered a pension plan if you don’t meet the criteria.

Before opting out of a workplace pension plan, it’s important to understand what you are rejecting:

• Your own payments to the plan (5% or more of earnings) are deducted from your salary, often before you pay tax, making it easier to save.
• Your employer also pays into the plan. At the very least, their payment must be equivalent to 3% of your earnings. Many employers offer more than this or match any extra payments you make for no extra work on your part. Why say no to that?

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2. DON’T say ‘No’ to extra money from the government

Anyone who decides against investing in a workplace or personal pension also turns down help from the government. That’s because in order to encourage people to save for retirement, the government gives tax benefits on pension payments. 

The nuts and bolts of how you receive these benefits depend on the type of plan you have and the rate of income tax you pay. But as an example, if you’re a basic-rate taxpayer saving into a personal pension in the current tax year, you get 20% tax relief on your payments. So, if you pay £200 a month into your pension plan, the £40 of tax relief you receive on that payment means it will only cost you £160. Higher-rate or additional-rate taxpayers could claim back even more.

Some workplace pension schemes offer tax benefits in a different way, such as through salary sacrifice or exchange schemes, so check with your employer if you’re not sure how this works for you. And in Scotland, the tax relief details differ slightly. But in all these cases, the general point is the same: each time you defer paying into a pension plan, you miss out on an extra boost. 

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3. DON’T expect the State Pension to cover everything

Another common mistake is to assume that the State Pension will meet your retirement needs. However:

• Firstly, the State Pension won’t be available until your late 60s.
• Secondly, it doesn’t go very far. Currently, the new flat-rate State Pension is £185.15 a week, or just over £9,600 a year. To put that in perspective, a full-time job on Minimum Wage (37.5 hours a week), would give you around £18,500 a year (before tax).

If you think you’d struggle on Minimum Wage, there’s every chance the State Pension wouldn’t cover all your needs. 

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4. DON’T lose track of your pension plans

Did you know there are over £19 billion worth of pension savings lying around unclaimed in the UK? With an average of almost £13,000 in each pot. One reason for this, thinks the Association of British Insurers, is because only 1 in 25 people thinks of telling their pension provider when they move home.

If you have moved jobs or home a few times, one of these ‘lost’ pension pots could be yours. You can find out more in our article.

Standard Life customers will find a useful pension finder tool on our app; the government also has a free Pension Tracing Service.

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5. DON’T assume that the minimum is enough

Auto-enrolment has boosted the pension savings of millions of people but the 8% minimum payment may not get you the retirement lifestyle you want.

When Which? surveyed more than 6,800 retirees last year, the average couple spent around £26,000 a year. Luxuries such as long-haul trips and a new car every five years raised this to £41,000.

To work out your own retirement costs, based on your preferences around holidays, eating out, gym memberships and so on, use our retirement planning tool. 

Then our online Pension Calculator can help you figure out if you want to top up your current payments.

It may not be possible to top up your pension payments right now. But remember, your pension plan is something you'll save into for many years to come. So it might be something to revisit later down the line if or when your circumstances change.

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6. DON’T leave your pension pot unloved or neglected 

You might not want to talk about your pension plan every day, but dismissing pensions as boring is a mistake, and one that becomes increasingly serious over time. 

Tools like our Retirement Calculator can be a wake-up call if you’ve neglected your pension savings too long. However, topping up your payments, especially in your 20s, 30s or early 40s, can make a large difference, thanks to the snowball effect of compounding.

Giving your pension plan some love – knowing whether it’s workplace or private, wising up on how to get more ‘free’ payments from your employer or the government, or using it to pay less tax (such as through bonus sacrifice) – could make a major difference to your long-term finances. A good starting point is our pension basics guide.

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7. DON’T suppose that one pension plan is the same as another

A related mistake is not knowing where your pension pot is invested, whether that matches your life-stage and priorities or how to choose the right investment options. For example:

• Is your pension plan age-appropriate? If your retirement is still some years ahead, you could potentially afford to take a little more risk. Conversely, you may want to dial down the risk as your retirement date looms.
• Does your plan reflect your goals? These could relate to anything from retiring early to investing responsibly. Viewed from that perspective, saving into a pension pot starts to look like an opportunity, not a chore. It really is worth engaging with it.

Remember the value of investments can go down as well as up and you may get back less than was paid in.

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What next?

We have plenty of guides and tools on our website and app to help you fund your ideal retirement. If you’re a Standard Life customer, you can also stop, start or manage your pension payments online or via our app.

This article shouldn’t be taken as financial advice and is based on our understanding in May 2022.

Standard Life accepts no responsibility for information contained on external websites. This is for general information only.

Laws and tax rules may change in the future and your own personal circumstances, including where you live in the UK, will have an impact on tax.