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State pension mistakes you need to avoid to reduce risk of falling short in retirement

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The state pension is claimed by over 12.4 million people in the UK, however, many could have made “common mistakes” which caused their finances to fall short later in life. Even with the current financial climate, experts recommend that people take the time to see if they can maximise their savings, particularly those relying on the state pension. Jenny Holt, managing director for customer savings and investments at Standard Life has highlighted seven common mistakes that people need to be aware of. Ms Holt first explains that Britons should not expect their state pension to meet the entirety of their retirement needs.

She highlights that people aren’t able to access their state pension until they are 66 years old and currently, the new flat-rate state pension is £185.15 a week which is just over £9,600 a year.

At the same time, the Pensions and Lifetime Savings Association (PLSA) calculates that a single person needs £10,900 a year for just a ‘minimum’ standard of living in retirement, this rises to £20,800 a year for a ‘moderate’ lifestyle.

It is recommended that people also think of other ways that they can save for their retirement.

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Ms Holt said that one of the first mistakes people have made is that they have turned down the opportunity to join a workplace pension from their employer.

She recommended that people should avoid doing this as it is “nearly always a good idea to join”.

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This is because a workplace pension scheme is made up of a person’s own payments which are deducted from their salary, often before they pay tax.

The rate that people pay is usually around five percent.

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It also consists of the employer’s contribution too, which at the very least, must be equivalent to three percent of a person’s earnings.

Ms Holt said: “Many employers can also offer more than this or match any extra payments you make which makes it much easier to save so it’s worth checking if you’re getting the most out of this valuable benefit.”

The second mistake that people can make includes declining extra money from the government as anyone who decides against investing in a workplace or personal pension also then turns down extra help from the Government.

This is because to encourage people to save for their retirement, the Government provides a top-up called tax relief to pension payments.

The relief is dependent on the tax a person pays. If a person is a basic-rate taxpayer into a personal pension in the current tax year, they will get 20 percent tax relief on their payments.

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Ms Holt said: “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.”

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Ms Holt highlights that some workplace pension schemes also offer a tax relief in a different way, through salary sacrifice or exchange schemes.

Due to this, Ms Holt recommends that people should check with their employer if people are not sure how it works for them.

Ms Holt said that Britons also need to keep track of their pensions particularly as many can now be part of several different schemes.

There is currently over £19billion worth of pension savings left unclaimed in the UK, with the average being almost £13,000 in each pot.

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Ms Holt said: “If you have moved jobs or home a few times, and not informed your pension provider, then one of these ‘lost’ pension pots could be yours. It’s worth spending time tracking down any potential missing pots to help boost your future finances.”

People should also look into what their pension pot could offer them as by not investing time into them could cause serious financial harm later.

Ms Holt said: “Giving your pension plan some love, knowing whether it’s a 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.”

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With the different pension schemes available in the UK, Ms Holt also said that people should not “assume that one pension plan is the same as another”.

She explained: “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, 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 you get nearer to retirement.”

Finally, Ms Holt urged Britons to not assume that the minimum will be enough as the current eight percent minimum payment may not get a person the retirement lifestyle they want.

She said: “It’s important to therefore have a retirement lifestyle in mind, the PLSA calculations can be helpful here as they can give you a real figure to aim for, and you can then work out what’s feasible and put the necessary steps in place to help you achieve your goals.”

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