With people living longer and the security of defined benefit (DB) pensions now a rarity, you may need to think more carefully than previous generations about how to build the retirement income you want.
Indeed, there’s a lot to consider when it comes to pension planning, from how long your retirement could last to how much you’ll need saved up to give you the lifestyle you want. This may involve complicated calculations and difficult choices.
And yet, research published by Professional Adviser has revealed that despite almost half (49%) of UK adults surveyed saying they felt uncomfortable with their level of retirement savings, only 1 in 10 (11%) had sought professional advice.
Unfortunately, this “DIY” approach to pension planning could potentially lead to mistakes that make it harder for you to achieve your long-term financial goals.
Read on to find out three of the most common pension mistakes and how you could avoid them.
1. Not saving enough to retire
Retiring without working out if you have enough to do so could increase the risk of running out of funds later in life and being unable to afford the lifestyle you want.
In fact, research by HSBC has revealed that two-thirds (62%) of adults in Britain face a ÂŁ10,000 shortfall against their desired retirement income.
Of course, how much is “enough” to retire will depend on what you want to do in your retirement and how long it is likely to last.
A common mistake many people make when calculating their retirement income needs is to underestimate, or completely ignore, their life expectancy.
Research by Canada Life found that people aged 50 and over on average believe they’ll live until around age 80. When in fact, the Office for National Statistics’ life expectancy calculator suggests that men and women aged over 50 now will on average live to be 84 and 87 respectively.
You can avoid the mistake of not saving enough to retire by:
- Starting to save as early as possible
- Factoring life expectancy into your retirement plans
- Thinking about what you plan to do during your retirement
- Considering how your spending might change over time.
A financial planner can use cashflow modelling to help you understand what your retirement income might look like based on your current saving and investment strategy.
This could help you assess if you’re likely to have enough to retire when you want to, or if you need to make some adjustments to your financial plan.
Read more: 3 powerful reasons to speak to a financial planner before you retire
2. Setting and forgetting your pension
It might be tempting to set and forget your pension, especially if your employer has automatically enrolled you in a workplace scheme.
However, your investments might not be aligned with your long-term financial goals if you:
- Accept the default option for where your pension wealth is invested
- Only make the minimum contribution each month
- Neglect to monitor your savings.
And yet, a surprising number of people make the mistake of setting and forgetting their pensions – according to Standard Life, 75% of UK adults don’t know how much is in their pension pot.
Failing to check your pension regularly could also result in “lost” pensions. This usually happens if you’ve moved between jobs several times throughout your career, without keeping track of the pensions you held with previous employers.
Losing older pensions could make it harder to understand the level of retirement income you can expect, which is necessary for effective financial planning.
You could avoid this mistake by regularly monitoring your pension funds and being proactive about making changes to keep your retirement plans on track – for example, by increasing your pension contributions.
You could also use the government’s free online pension tracing service to track down any lost pensions.
3. Failing to consider the tax implications of withdrawals
According to reports by Unbiased, around 615,000 people have accessed pensions using drawdown since Pension Freedoms legislation was introduced in 2015.
This legislation allowed savers greater flexibility in accessing their pension from the normal minimum pension age of 55 (rising to 57 from April 2028). So, you could take an income from your defined contribution (DC) pension when you retire – “income drawdown” – while allowing your pension fund to continue growing.
However, accessing a pension too soon could mean that your savings have less time to grow.
Imagine you take 25% of your pension pot when you reach 55. This is usually the maximum amount you can take as a tax-free lump sum. You would miss out on any investment returns your 25% sum might have generated over future years.
Additionally, when you start making flexible withdrawals, you could trigger the Money Purchase Annual Allowance, which limits tax relief on future contributions to ÂŁ10,000 (2023/24) a year.
So, accessing a pension too early could have tax implications for both withdrawals and any future contributions you wish to make.
Instead, by carefully planning how you take money from your pension, you could avoid paying more tax than you need to.
For example, you might want to consider spending other assets first and preserving your pension as long as possible. This could give your savings the opportunity to grow more, and if you’re still making contributions, you could benefit from your full Annual Allowance – which is £60,000 or 100% of earnings for most people – each tax year.
A financial planner can help you avoid these common pension mistakes and develop a tax-efficient retirement income strategy that aligns with your long-term goals.
Get in touch
If you’d like to learn more about how to manage your pension effectively, please contact us by email at info@lloydosullivan.co.uk or call 020 8941 9779 to see how we can help you.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The Financial Conduct Authority does not regulate cashflow planning or tax planning.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
Workplace pensions are regulated by The Pension Regulator.
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