Savers risk losing £1,300 each month with one pension mistake – expert | Personal Finance | Finance

The tax-free benefits of pensions could be outweighed if savers make the wrong choice when deciding where to stick their retirement fund, an expert has warned.

Failing to actively engage with pensions during an entire working life could have a staggering financial impact, according to a report from PensionBee, an online pension provider.

Saving into a pension will almost guarantee you some money you can use to fund your retirement. If you are a basic rate taxpayer, every £100 is worth £120, while higher and additional rate taxpayers get even more tax relief.

The money in a pension fund, once it is invested, is vulnerable to stock market movements, so the value will go up and down. Over several decades, a pension will have experienced some growth, but how much will depend on which type of funds it is invested in.

Pension Bee is urging savers to look at where their pension cash is being invested. It said over 90% of pension savers remain in default funds, which while convenient may not make the most of thier money.

A saver achieving just 3% annual investment growth could see their fund grow to £194,185 by age 68. However, those in a fund achieving 7% growth could amass £697,247 – a staggering £503,061 difference.

Towards the end of a working life that could be £16,000 a year or £1,300 a month.

Investing only the minimum required contribution into a workplace pension is also common. However, a saver contributing 13% of their qualifying earnings instead of the minimum 8% (5% personal contribution and 3% employer contribution) could accumulate an extra £121,366.

Meanwhile, opting out of pension contributions for just three years at age 30 could reduce the retirement pot by £17,445, and delaying starting contributions until 30 instead of 21 could result in a £53,085 shortfall.

Paying high management fees and losing track of hard-earned pension pots can diminish retirement savings. Paying annual fees of 1% could shrink pension savings by £17,711, compared to paying fees of 0.7% Additionally, losing a £10,000 pension pot at age 30 could reduce your final pot by £23,544.

PensionBee said savers age 18-54, or in the so-called accumulation phase of retirement saving, need to understand how small, consistent actions can lead to significantly better retirement outcomes.

• Check your pension regularly: On average, customers who checked into their pension using an app were five times or more per month held pension values three times greater (£31,076) than those who logged in less frequently (£9,614). Across all age groups, more frequent logins correlated with larger pension pots.

• Be proactive: Customers who elected to switch from the default plan to more specialised funds held higher average pension values (£24,604) compared to those remaining in the default fund (£15,220).

• Engage with educational content: Customers who used a pension calculator tool 2-3 times saw their pots grow threefold in around six years, compared to pots doubling for those who didn’t, over the same period.

Lisa Picardo, chief business officer UK at PensionBee, said: “Engaging with your pension doesn’t have to be overwhelming. Many people put it off until retirement is near, by which time changing the outcome is much harder.

“Simple steps such as regularly reviewing your pension, consolidating old pots, and increasing contributions when possible can dramatically improve retirement outcomes. But the responsibility doesn’t only lie with savers. The pension industry must do more to support customers by simplifying fund information, making it easier to compare options and make informed decisions.

“Government action is also key to empowering savers to build the retirement they deserve. Introducing a 10-day pension switch guarantee would eliminate unnecessary delays, facilitate timely decisions, and allow savers to switch to providers that are more aligned with their individual needs or that offer better value for money.”

Impact of different investment growth rates on pension pot size at retirement

Assumes a starting salary of approximately £25,000 at age 21, average annual salary increases of 2%, 8% pension contributions from age 21 to 54, 0.7% in annual management charges and no withdrawals over the period.

Table 2: Impact of contribution rates on pension pot size at retirement

Assumes a starting salary of £25,000 at age 21, average annual salary increases of 2%, pension contributions from age 21 to 54, 3% annual investment growth, 0.7% in annual management charges and no withdrawals over the period.

Table 3: Impact of auto-enrolment opt out on pension pot size at retirement

Assumes a starting salary of £25,000 at age 21, average annual salary increases of 2% pension contributions (from age 21 to 54), 3% annual investment growth, 0.7% in annual management charges and no withdrawals over the period.

Table 4: Impact of starting ages for contributions on pension pot size at retirement

Assumes a starting salary of approximately £30,000 at age 30, average annual salary increases of 2%, 8% pension contributions from age 30 to 54, 3% annual investment growth, 0.7% in annual management charges and no withdrawals during the period.

Table 5: Impact of paying 0.7% vs 1% in fees on pension pot size at retirement

Assumes a starting salary of £25,000 at age 21, average annual salary increases of 2%, 8% pension contributions from age 21 to 54, 3% annual investment growth and no withdrawals during the period.

Table 6: Impact of paying 0.7% vs 1% in fees on pension pot size at retirement

Assumes a starting salary of £25,000 at age 21, average annual salary increases of 2%, 8% pension contributions from age 21 to 54, 3% annual investment growth, and no withdrawals during the period.

Table 7: Impact of losing a £10,000 pension pot at age 30 on pension pot size at retirement

Assumes a starting salary of £25,000 at age 21, average annual salary increases of 2%, 8% pension contributions from age 21 to 54, 3% annual investment growth, 0.7% in annual management charges and no withdrawals during the period.