RETIREMENT GUIDE: pension mistakes to avoid – part 1

Those who accumulate significant retirement funds tend to have made good financial decisions throughout their working life, yet the transition from paying in to extracting income can pose challenges to even the experienced investor.

It likely took you a lifetime of saving and investing to accumulate a significant retirement savings and, at this stage of your life, you simply may not have the time to recover from some of these mistakes.

This guide is designed to help you avoid investing blunders that you may regret.

Not factoring inflation

Long term Inflation has averaged a moderately low 4% since 1915. The cost of living crisis of 2022 has made this topic front and centre; with UK inflation (CPI) currently 9% the resulting impact of rising prices is felt across the population.

The Bank of England expects inflation to reduce from current highs to level off around the long term average rate. So why worry about inflation, especially during times when it might be low? 

First, your personal inflation rate might be much higher. Second, even a small increase in inflation, barely perceptible in your week-to-week or month-to-month spending, can make a huge difference in your spending power over time.

In the twelve months to May 2022, inflation was 9% (meaning the cost of everyday purchases was 7% higher than the year before). The Bank of England expects inflation to continue rising, exceeding 10% by the end of 2022. This means that keeping money in cash is a good way to lose 10% per year.

So whether inflation becomes a dramatic problem or simply an ongoing, insidious erosion of your purchasing power, it is something investors should prepare for if they want their retirement funds to keep pace with increasing costs. For some, a too-conservative, fixed-interest investment strategy just might be a big mistake that only reveals itself over time. And to make matters worse, people sometimes find they actually spend more in retirement than they did whilst working. Travel, fixing up the house, a second home and helping adult children and grandkids can quickly drive up expenses.

Falling victim to a scam

Anyone can be the victim of a pension scam, no matter how financially savvy they think they are. It’s important that everyone can spot the warning signs.

Scammers try to persuade pension savers to transfer their entire pension savings, or to release funds from it, by making attractive-sounding promises they have no intention of keeping.

The pension money is often invested in unusual, high risk investments like:

Or it can be simply stolen outright.

For further details read The Pension Regulators booklet on how to spot a scam (PDF, 122kb, 2 pages)

Many scammers can also persuade savers to transfer their money into single member occupational schemes, or other exotic sounding schemes.

Scammers will sometimes promise savers early access to their pension pot through loans or ‘loopholes’. Savers could lose all their money and face a high tax bill from HM Revenue and Customs (HMRC) if they withdraw their pension savings before the age of 55.

Trying to time the market

Attempting to time the market perfectly and consistently is likely to disappoint.

Corrections (market drops of about 10% to 20%) can come without warning and end just as quickly as they started. On the other hand, bear markets (declines of about 20% or more for an extended period) generally come on slowly and rarely announce themselves. Importantly, bear markets are based on fundamentals. Corrections are sentiment-based and can change rapidly. That’s why it is so hard for even investment professionals to time the market.

For a long-term investors, it is prudent to stay invested throughout market cycles. Just remember, predicting a bear market before it happens is extremely difficult, and avoiding all negativity is impossible. Further, trying to avoid all market negativity can have significant consequences if you’re wrong. Being out of the market can mean missing important up days, which can add up to huge opportunity cost over time.

Now consider for yourself, do you have sufficient ongoing information and analysis to time all those market moves? Do you know anyone who is? Before you try to time the market, remember what the legendary US investor Benjamin Graham once said: ‘In the short run, the market is a voting machine, but in the long run, it is a weighing machine.’

The herd mentality

Investment markets often move on anticipation of events, and if everyone has the same information that has you excited, the advantage is gone. One of the biggest reasons individual investors generally do worse than the market averages is that they tend to panic-sell when the market is down and buy when the market is nearing its peak. Another form of this is chasing hot funds, fund managers or allocating to speculative assets such as crypto.

Taking advice from talking heads / financial influencers

Consuming financial media can sometimes work against being well-informed. The reality is, the financial press simply has to write or say something every day, and feels obligated to give reasons why market events happened and what might happen next. However, as far as I can see, no one is consistently keeping track of how well they do. You are correct to be cynical of the quality of information about daily market moves and I would strongly urge you to be cautious about making major financial decisions based on what you hear or read in the mass media.

In the next blog I will complete the guide covering issues such as investment choices, risk/reward dynamics, pension withdrawals and the impact of excessive fees.

Barra Gorman FPFS

Chartered Financial Planner

The purpose of this article is to provide technical and generic guidance and should not be interpreted as a personal recommendation or advice.