Update your retirement age or risk losing £10,000 from your pension

Millions of pension savers could miss out on thousands of pounds in retirement income by failing to update their planned retirement age, according to new findings from Aviva.

While government changes have given people the flexibility to continue working in their later years, few people have told their pension providers.

Here we take a look at just how costly this mistake could be and how to avoid it.

Why are pensions at risk?

Recent changes have given workers the flexibility to keep working for longer.

In 2011, the government removed the 'default retirement age' (DRA) which had enabled employers to force their staff to retire at the age of 65, regardless of whether they wanted to continue working or not.

Then, in December 2018, the state pension age was equalised for both men and women. This meant that the state pension age for women increased from 60 years to 65 years - the state pension age for men - and it will rise to 66 in October 2020.

While these changes have given people the chance to work for longer, some employees are putting their pension income at risk by failing to change the retirement age specified on a defined-contribution pension scheme.

When you save into a defined-contribution pension scheme, your money is invested in higher-risk assets, which offer higher returns, to help your pension pot grow.

As you approach your retirement age, your pension pot is invested into lower-risk assets, with lower returns, to protect your retirement savings from sudden market changes.

If a pension provider holds a retirement age that is too low, your investments will be moved into less risky assets too early.

Impact of stated retirement age

In this fictional example, two people aged 55 are aiming to retire at 65. One has their retirement age set at 65, the other set at 60.

How much money could you lose from your pension?

Failing to update your retirement age could knock tens of thousands of pounds off your retirement income.

An average earner in an automatic enrolment scheme could miss out on almost £10,000 by leaving their retirement age set to 60 if they retire at 68.

Those who leave their retirement age set at 65 could lose over £4,000 in retirement income if they actually retire at 68.

Almost half of all workers in the UK are saving into defined-contribution pensions, according to the office for National Statistics (ONS). The majority (90%) of these savers could be affected by this issue, according to Aviva's research.

To make sure you're not among them, get in touch with your pension provider. If you don't know your pension provider, your employer should be able to tell you.

• Find out more: how pensions work

What is a defined contribution pension?

Most people entering the workforce now are on defined contribution pension schemes.

These work by you paying a percentage of your salary into the pension scheme each time you get paid. For most workers saving into a company pension, the government and their employer also contribute to their retirement savings.

The longer you contribute, and the faster your pension can grow through investment, the more money you'll have to retire on.

These contributions aren't liable for tax, which helps you maximise what you save.

• Find out more: defined contribution pensions - all you need to know

How to boost your pension

Whether you've just started your career or are looking to retire soon, here are three simple ways to help boost your pension income.

1) Check your state pension

Check your state pension entitlement to help determine if and how much you're likely to receive when you reach state pension age - and whether you'll actually receive the state pension.

You can get your government State Pension forecast here.

2) Maximise your employer's contributions

When you increase your contributions to a workplace pension or private pension, some employers will also boost the amount they contribute.

The table below shows the minimum employer contributions, but some employers may offer more generous terms - so it's worth checking to see if you could get a boost if you increase what you pay in.

3) Monitor your pension regularly

Monitoring your pension regularly will help you keep your savings on track. You can also check in on the performance of your pension fund.

Contact your pension provider to find out the best way to keep track of how your pension is tracking. This should become easier to do with the introduction of pensions dashboard, later this year or in early 2020, which will allow you to view all of your pensions data online.

For more tips and information on how to build up your retirement income check out our comprehensive pensions and retirement guide.