The Top 5 Pension Mistakes You’re Probably Making and How to Fix Them.

When it comes to planning for retirement, one of the most valuable tools in your financial toolkit is your pension. It ensures that the lifestyle you've worked hard to build remains intact even when you’re no longer earning a regular paycheck. However, navigating the pension system can be tricky, and many people make costly mistakes that impact their financial future. In this post, we’ll explore five common pension mistakes and, more importantly, how to avoid them.

1. Not Starting Early Enough:

One of the biggest mistakes people make with their pensions is waiting too long to start contributing. Retirement might seem like a far-off event, especially when you’re in your 20s or 30s. However, the earlier you start saving, the more time your money has to grow through compound interest.

Why It’s a Problem: Delaying pension contributions means you’ll have to save significantly more later to make up for lost time. You may also miss out on employer contributions and potential tax benefits in the earlier years of your career.

How to Avoid It: Start contributing to your pension as early as possible, even if it's just a small amount. Over time, these contributions will grow thanks to compound interest. If you're in a contributory pension scheme, ensure you’re taking full advantage of any matching contributions from your employer.

Tip: Consider setting up automatic contributions to your pension account so that you don't forget or miss out on opportunities to save regularly.

2. Withdrawing Pension Funds Too Early

In Nigeria, some individuals find themselves withdrawing from their Retirement Savings Account (RSA) or other pension funds prematurely due to unforeseen financial difficulties. While this may seem like a quick fix to meet immediate needs, it can significantly reduce the funds available for retirement.

Why It’s a Problem: Withdrawing from your pension before retirement age often means you’ll lose out on the compounding growth that would have built over time. In addition, early withdrawals may come with penalties, reducing the amount you receive. You also lose the potential for long-term tax benefits.

How to Avoid It: Treat your pension funds as untouchable until you reach retirement. Instead, build an emergency savings account separate from your retirement funds, so you have a financial buffer for unexpected expenses. If you're considering an early withdrawal, first consult with a financial advisor to explore other alternatives.

Tip: Pensions are long-term investments. The more you leave your pension untouched, the larger your retirement fund will grow, ensuring you maintain financial security later in life.

3. Failing to Regularly Update Your Pension Information

Life changes. Whether it’s a new job, a change in marital status, or moving to a new location. These changes can affect your pension. Many people forget to update their pension records, leading to complications when they try to access their pension in retirement or make contributions while changing jobs.

Why It’s a Problem: Outdated personal information (such as your contact details, name, or beneficiaries) can create significant delays when you need to access your pension benefits. In the worst-case scenario, it may result in your pension going to the wrong beneficiaries.

How to Avoid It: Whenever you experience a major life change such as getting married, changing jobs, or relocating—make it a priority to update your pension information. Ensure your Retirement Savings Account (RSA) is kept up-to-date with accurate personal details and your preferred beneficiaries.

Tip: If you're unsure whether your records are current, reach out to your Pension Fund Administrator (PFA) to verify and update any outdated information.

4. Not Making Additional Voluntary Contributions (AVCs)

Many people are unaware that they can make Additional Voluntary Contributions (AVCs) to boost their pension savings beyond the mandatory deductions from their salary. While your regular pension contributions will help, AVCs allow you to take advantage of tax benefits and significantly enhance your retirement fund.

Why It’s a Problem: Relying solely on the statutory pension contributions may not be enough to maintain your desired lifestyle in retirement, especially if you start contributing late. Without AVCs, you might find yourself struggling to meet financial needs later in life.

How to Avoid It: Consider setting aside a portion of your income each month as an Additional Voluntary Contribution. AVCs are tax-deductible, which means they not only help you save more for retirement but also reduce your taxable income today.

Tip: Even small, consistent AVCs can lead to substantial growth over time, making a huge difference in your retirement lifestyle. Consult your Pension Fund Administrator to start making AVCs today.

5. Choosing the Wrong Pension Fund

Many pension schemes, including those in Nigeria, offer multiple fund types based on your age and risk tolerance. Some individuals don’t take the time to review the different fund options and end up in a fund that doesn’t match their financial goals or risk appetite.

Why It’s a Problem: Being in the wrong fund can either expose you to unnecessary risk or limit your growth potential. Younger individuals with more time until retirement might benefit from higher-risk, higher-reward funds, while those closer to retirement should be in more conservative, stable funds to protect their savings.

How to Avoid It: Familiarize yourself with the different pension fund options available, such as the RSA Multi-Fund Structure in Nigeria. Choose a fund that aligns with your age, risk tolerance, and retirement goals. If necessary, consult with a financial advisor or your Pension Fund Administrator to ensure you're making the right choice.

Tip: Periodically review your fund selection as you age and your risk tolerance changes. This ensures that your pension is working for you at every stage of your life.

Final Thoughts: Secure Your Future by Avoiding These Pitfalls

Your pension is a key element of your financial future, and making mistakes with it can significantly impact your retirement. By avoiding these common errors—starting late, withdrawing early, failing to update your information, neglecting AVCs, and choosing the wrong fund—you can ensure that you’re on the right path toward a secure and comfortable retirement.

Take control of your future today. Start early, stay informed, and ensure that your pension works for you every step of the way. And if you need help, PAL Pensions is here to guide you through every phase of your retirement planning journey.