Simple pension pot error could leave you with £50,000 less than expected
THOUSANDS of pension savers are overestimating their future retirement pot by as much as £50,000.
Research from consumer group Which? highlights how a worrying number of people don’t know much money they’ll get from their state pension.
In some cases, savers are expecting up to £50,000 more than they’ll actually get, which could cause them money difficulties in later life.
It also means some people could be saving far less than they need in their private pensions, due to thinking that they’ll be getting a larger sum from the government.
Which? found three in ten people are overestimating their future state pension payments.
In the biggest of pension gaps, one in ten savers thought the state pension is worth £200 a week or £10,400 a year on average.
What are the different types of pension?
WE round-up the main types of pension and how they differ:
- Personal pension or self-invested personal pension (Sipp) – This is probably the most flexible type of pension as you can choose your own provider and how much you invest.
- Workplace pension – The Government has made it so it's compulsory for employers to automatically enrol you in your workplace pension, unless you choose to opt out. These so-called defined contribution (DC) pensions are usually chosen by your employer and you won't be able to change it. Minimum contributions rose to 8% in April 2019, with employees now paying in 5% and employers contributing 3%. This is up from the 5% of contributions workers and companies were required to pay in previously, where employees contributed 3% and employers 2%.
- Final salary pension – This is a also a workplace pension but here, what you get in retirement is decided based on your salary, and you'll be paid a set amount each year on retiring. It's often referred to as a gold-plated pension or a defined benefit (DB) pension. But they're not typically offered by employers anymore.
- New state pension – This is what the state pays to those who reach state pension age after April 6 2016. The maximum payout is £175.20 a week and you'll need 35 years of national insurance contributions to get this. You also need at least ten years' worth of national insurance contributions to qualify.
- Basic state pension – If you reached the state pension age on or before April 2016, you'll get the basic state pension. The full amount is £134.25 per week and you'll need 30 years of national insurance contributions to get this. If you have the basic state pension you may also get a top-up from what's known as the additional or second state pension. Those who have built up national insurance contributions under both the basic and new state pensions will get a combination of both schemes.
This means some people may be overestimating the amount they will get from state pension by as much as £49,400 over the average length of retirement.
The new state pension is currently worth £175.20 per week, while the old basic state pension is £134.25 per week.
While these are the full amounts you could get, not everyone is entitled to this and you could get less.
The actual amount you will get depends on your National Insurance record and how many credits you’ve accumulated in your working life.
Both the new and old basic pension are set to increase by 2.5% from this April, boosting some pots by up to £230 per year.
But Which? says people currently claiming the old basic state pension receive £148 a week on average, while people receiving the new pension get a weekly average of £158.
Top tips to boost your pension pot
DON’T know where to start? Here are some tips from financial provider Aviva on how to get going.
- Understand where you start: Before you consider your plans for tomorrow, you'll need to understand where you stand today. Look into your current pension savings and research when you’ll be eligible for the state pension, and how much support you’ll receive.
- Take advantage of your workplace pension: All employers are legally required to provide a workplace pension. If you save, your employer will usually have to contribute too.
- Take advantage of online planning tools: Financial providers Aviva and Royal London have tools that give you an idea of what your retirement income will be based on how much you're saving.
- Find out if your workplace offers advice: Many employers offer sessions with financial advisers to help you plan for your future retirement.
If you're a man born on or after April 6, 1951, or a woman born on or after April 6, 1953, you'll be able to claim the new state pension.
Anyone who reached the state pension age before April 6, 2016 will be getting the old basic state pension.
According to Which?, fewer than three in ten people knew or guessed the average amount people get from their state pension.
Meanwhile, a quarter of savers surveyed by the consumer group wrongly thought that everyone gets the full £175 a week for the new state pension.
A further three in ten people correctly guessed that the current state pension age is 66.
A third of savers thought the state pension age was 67, but this increase won’t happen until between 2026 and 2028.
Finally, around four in ten people knew that you now have the option to cash in an entire defined contribution pension, arrange an annuity or use pension drawdown.
Nearly four in ten correctly said 55 as the age at which you can first access your defined contribution pensions.
Meanwhile, one in ten people wrongly thought you could access this benefit at 50.
This age will rise to 57 from 2028 amid fears that allowing savers to access their savings at 55 could lead to some running out of money later in life.
For its research, Which? calculated the average length of retirement as between the ages of 66 to 85 and quizzed 2,000 people.
Jenny Ross, Which? money editor, said: “Our research shows that there is still a lot of confusion around key pension rules, so more needs to be done to improve public understanding and engagement to put people in a stronger position to plan for retirement.
“It’s been five years since the government first committed to introducing the pensions dashboard, so it’s crucial there is no further delay in its delivery as some consumers have struggled for too long with a complex, fragmented pensions system.
“Dashboards have the potential to bring huge benefits for people in bringing together all their pensions in one place – including the state pension – which should help millions of people to keep track of their savings and understand them better.”
We've rounded up everything you need to know about how you can claim your state pension.
Pension savers could also be missing out on thousands of pounds if they don't tell their pension provider when they're considering retiring.
And in worrying news, retirees are turning their pension pots into cash at a record pace – but it's dragging down savings rates for everyone.
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