Too many people bury their head in the sand when it comes to planning for their financial future. In this article I want to look at the issues that you really cannot afford to ignore. When I use the term ‘pension’ I am referring to any kind of investment being used as retirement provision, rather than just traditional plans and as expats such arrangement are rarely available to us.
The facts are that most people are facing a significant shortfall in their retirement income, According to the Association of British Insurers, the average UK pension pot at retirement is just £36,800. In the US, the Employee Benefit Research Institute has calculated that 46% of all American workers have less than $10,000 saved for retirement and 29% of all American workers have less than $1,000 saved for retirement. Worrying figures indeed.
If you want to ensure you have enough money to live comfortably when you retire, here is my list of the top 10 pension mistakes to avoid
1. Not having a pension at all
If you have not saved up, what are you going to live on when you stop working? Will you ever be able to stop working? State Pensions, for the minority who are eligible for such benefits, are low and as an example the basic UK state pension is currently just £110.15 a week, that’s assuming you even get the full amount. That’s just £5,722 in the current tax year.
State pension ages are also increasing in many countries, so if you want to retire earlier you certainly require private provision.
2. Delaying your pension saving
The two biggest factors that determine how much your pension funds will be worth at retirement are the amount you put in and the length of time it remains invested. The sooner you start saving into a pension the better, even if you are saving a small amount
Research by the UK insurance company Legal & General reveals that to achieve an annual pension income of £10,000 by the age of 65, if you start saving at the age of 25 you would need to save £105 each month. Leave it until you’re 35, and you’ll have to find £195 a month; until 45, £405 a month; and wait until you’re 55, £1,100 a month.
As a general rule of thumb, people should be saving about half of their age as a percentage of their income. So if they start when they are 20, they should be saving 10% of their income each year into a pension, but if they leave it to 30, they need to save 15% of their income into a pension each year.
3. Not realising how much you really need for a comfortable retirement
We are living longer, often remaining healthy for longer and an active retirement costs money. In 1991 half of American workers planned to retire before the age of 65. Today, that number is just 23%. Large sums are required to generate a decent level of income, but for many this is achievable if they start soon enough and plan properly.
The End of Service Gratuity payable to employees in the UAE, whilst certainly useful, is not adequate replacement for real investment for your future.
4. Thinking your home is your pension
This is a fairly common suggestion, but there are reasons why this is wrong.
First, the probability of ever benefiting from an increase in the value of your home is actually quite low. You will always need a roof over your head – so if the home you’re living in is supposed to be an investment how does that work? Second, your home would be the only investment that you keep paying into, to suit your changing needs and tastes. There are also the costs of upkeep, repairs, insurance etc. Thirdly, in many cases the sentiment that “my home is my pension” is an excuse to avoid making real retirement provision.
Your home only becomes an investment when you are prepared to sell it and trade down for the rest of your life.
5. Being too cautious
A common problem in pension planning is to not take enough risk when there may be a 10 or 20 year timeframe before you need to access the money. Over the long term, proper investing provides the best opportunity to grow your pension fund over and above the rate of inflation.
According to analysis by Barclays, an investment of £10,000 in the shares that make up the UK FTSE All Share index between January 1985 and the end of June 2010 would have grown by more than 11 times its original value. Cash, meanwhile, would have increased by just over two-and-a-half times during the same period.
6. Stopping contributions in a bad market
When stock markets fall and the economy falters, many investors get nervous. Some decide to stop contributing to their investments or pension in case the value of the funds they are invested in fall, but this could be a mistake. When the markets fall in value, it is actually cheaper to invest as unit costs are reduced and this will result in bigger increases when markets recover.
7. Failing to review your pension provision regularly
Do you know how much your pension is worth? Do you know how many you have or where they are? How about the type of funds they’re invested in or how much risk is involved?
If the answer to any of these questions is no, you need to take stock and plan to review your pension at least once a year and every time your personal circumstances change. Make sure your pension is on track to grow enough to support you in retirement.
8. Not being aware of tax issues
Being an expat when it comes to retirement planning can have both advantages and disadvantages. Whilst you may not have access to home country pension plans with tax incentives for contributions, most of us can now invest in plans and funds without any tax deductions on growth. It is important to ensure that your savings plan won’t leave you with a tax liability if you repatriate, but certain investment options even have advantages when you return to a home country.
9. Failing to investigate all the options when it comes to taking benefits
For most people, there are now options as to when and how you draw your pension. Annuities are no longer compulsory for UK pensions and even if this is your preferred option you can shop around for the best rates. Look into the alternatives so that you get the best value for money in your circumstances.
10. Not getting the best advice
Be wary where you get your advice from. Financial services in the UAE are, in my view, insufficiently regulated, and pensions and retirement planning can be very complicated issues. The much touted QROPS is not suitable for most people and proper advice and management from an experienced and qualified adviser who has your interests at heart will make a significant difference.
Keren Bobker is an Independent Financial Adviser at Holborn Assets and writes at financialuae.me