Martin Lewis discusses NI contributions to pension
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A good place to start could be with a pension – often viewed as key to securing a comfortable retirement. With this in mind, Richard Harwood, financial planner at wealth manager RBC Brewin Dolphin, outlined five key mistakes people should avoid with their pension when entering 2023. Avoiding these mistakes will help Britons successfully progress towards their goals in the short and long term.
Mistake one: Stopping pension contributions
The cost of living crisis can create an immediate squeeze on pockets, meaning some will be looking for ways to cut back.
However, the expert has warned it is vital not to stop pension contributions wherever possible, as this could have a substantial impact later down the line.
Mr Harwood said: “Missing pension contributions – even for just a couple of years – can have a devastating impact on the lifetime growth of a fund.
“Ensure you receive your employer contributions – which is essentially free money! And make contributions yourself in order to gain the compounded investment return over time.”
Mistake two: Discounting an annuity off the bat
Annuities offer a guaranteed income for life but they have fallen out of favour in recent years due to poor rates.
They are, however, making a resurgence as rates have substantially improved recently. However, with many opting for drawdown, it could be the case annuities are avoided.
Mr Harwood explained: “People often dispel annuities straight away because of low rates over the past few years.
“Although not fantastic at the moment, there’s a lot to be said for guaranteed income. Of course, each situation is different, but it should absolutely be on your list of things to consider.”
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Mistake three: Stopping contributions or retiring early due to the Lifetime Allowance
The Lifetime Allowance (LTA) limits how much a person can save tax-free into their pension across their life, and exceeding it could mean a 55 percent tax charge.
As the LTA has been frozen until 2028 by Chancellor Jeremy Hunt, there is a greater risk of hitting the limit.
However, the expert warned people should not necessarily be dissuaded, and added: “Don’t just stop contributing without thinking about the options.
“Although slightly less of an attractive option, it may well still be better to have employer’s contributions and a growing fund and paying a small amount of tax than stopping contributions or retiring altogether after hitting the LTA.”
Mistake four: Hoping for the best
Mr Harwood continued: “Cashflow modelling is a useful process for anyone at any stage of their pension journey, but particularly for those who are taking income or coming up to taking an income.
“It is vital to ensure a pension is sustainable, and cashflow modelling helps us to contextualise this.
“For example, with a recent client, his funds were expected to last 17 years at the point he started to take income, but at current levels of returns, the fund has had one year of missed growth and one year of losses, so would now last 14 years.
“That makes quite a difference and is why it’s vital to do cashflow and revisit regularly.”
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Mistake five: Making assumptions
The expert said assumptions are often made, particularly about Defined Benefit final salary pensions.
Many often forget these arrangements will be indexed, but these increases are usually capped at three or five percent.
He added: “With inflation rates such as those we are currently experiencing, your deferred pension benefits’ ability to keep pace with inflation may well be limited – so it’s important to be careful of assumptions around occupational pensions.”
With pensions, people should always be aware capital is at risk – individuals may get less back than they originally put in.
Some may wish to seek the assistance of a financial adviser, or gain free, impartial guidance from PensionWise.
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