10 pension mistakes that could cost you thousands of pounds in retirement savings

Pension savers have been encouraged to read up on the benefits and rules around pensions to make sure they get the most out of their schemes and don’t miss out on any funds.

Experts at WEALTH at Work have put together a list of 10 pension mistakes, some of which could mean you missing on many thousands of pounds in savings.

Jonathan Watts-Lay, director of WEALTH at Work, said: “There is a lot at stake, and unfortunately mistakes can be made. However, with some thorough planning you can make sure that you don’t pay unnecessary tax, and live your retirement reassured that you are making the most of the savings you have.

“If you are not sure or are struggling to understand your options, it is important that you do your research and get some help.

“Many workplaces now offer their employees support such as financial education, guidance and access to regulated financial advice to help them understand their retirement income options, so you should speak to your employer to see what’s available.”

These are the 10 common mistakes that people need to be wary of:

Withdrawing savings from a pension early

With the rising cost of living, many over 55s in full-time employment are withdrawing from their pension early but this will reduce the amount a person can get over their lifetime.

The group said: “Withdrawing money out of a pension earlier than planned really should be a last resort and individuals must understand the dramatic impact this can have on retirement savings, which could include either having to work longer or having less income in retirement.”

Not understanding how pensions are invested

Pension savers often don’t realise that as they approach their chosen retirement age, their funds are often invested in less risky ‘lifestyle funds’, which are lower risk funds including bonds and cash.

But as many people now access their pensions using income drawdown, rather than through an annuity, they may prefer for their money to be invested in equities long into their retirement so their funds can keep growing.

WEALTH at Work encourages people to talk to their pension provider to find out what investment path they are on and to see if it is aligned with their retirement income plan.

Missing out on lost pensions

The total value of lost pension pots grew to £26.6billion in 2022. A person can lose track of their pension when they move jobs, when they move house or if they have not updated their details with their provider.

An individual with lots of different pensions may want to consolidate them into one pot so their funds are easy to track and they have one investment strategy.

You shoud check there aren’t any enhanced features or protections that are lost by transferring and that the chosen scheme si flexible about how money is accessed during retirement.

Not shopping around

As more people are going for income drawdown rather than an annuity, Britons are urged to shop around to make sure they get the best deal.

Research by Which? in 2022 found the difference in growth between the cheapest and most expensive drawdown plans for a £260,000 pot was nearly £18,000 over a 20-year period.

Withdrawing cash to put in the bank

Those thinking of moving their retirement savings into a bank account or into other savings and investments should note their money may lose value over time, as returns on savings accounts usually do not keep up with inflation.

They will also lost out on the tax benefits of a pension scheme so it may be better to keep the funds in the pension fund.

WEALTH at Work calculated that if someone took £20,000 from their pension, they could receive the first £5,000 (25 percent) tax-free.

The remaining amount would then be taxed as earned income, which for a basic rate tax-payer would mean a tax charge of £3,000, leaving them with £17,000 net of tax.

If this was then deposited in a savings account, they would then only be receiving interest on this lower sum (£17,000 rather than £20,000) and the money would also form part of their estate for inheritance tax purposes.

First time high-rate tax payer

One rule some people don’t realise is that income tax on income from their pensions once the 25 percent tax-free lump sum has been taken.

This could lift someone into paying the higher rate of income tax for their first time, especially if they are working.

For example, a person aged over 55 earning £40,000 a year and who has £30,000 in pension savings, who decides to withdraw all their pension, could get 25 percent of this (£7,500) tax-free, while the remaining £22,500 would be eligible for tax.

As their taxable income for that year would be £62,500 (£40,000 salary and £22,500 pension), they would become a higher rate taxpayer, with 40 percent tax to pay on the £12,230 income above the £50,270 higher tax threshold.

Not considering all savings

When deciding how to arrange your retirement income, you should look at all your savings and investments, including pensions, ISAs, or shares, to make sure they are being used in the most tax-efficient way.

A person may benefit from first deriving income from savings that aren’t liable for income and inheritance tax, while leaving their pensions to continue to grow in value.

Underestimating or overestimating life expectancy

Before a person starts drawing funds from their pension, they should think about if they have enough money to last them through their retirement.

A person may live longer than they expect to and so may need more savings than they initially thought they would need.

Another risk is that a person is to cautious and underspends in their retirement. The experts said: “Often the early years are the most expensive, when individuals are hopefully well enough to enjoy retirement, and possibly travel.

“In most cases, the amount needed declines into retirement unless care is needed, individuals should ensure they keep this in mind when planning their retirement spending.”

Losing life savings to pension scams

The pensions regulator has warned that pension savings are a “huge target base” for scammers. If someone is moving around their pension savings, they shod check the company they are using is registered with the FCA (Financial Conduct Authority).

Pension savers can also visit the FCA’s ScamSmart website which includes a warning list of companies operating without authorisation or running scams.

Not getting help from the right place

Research from WEALTH at Work found more than half of working adults say they get advice around pensions from unqualified sources such as family, friends or colleagues, or no one at all.

Only 15 percent said they speak to their pension provider and even fewer speak to a regulated financial adviser or other pensions advice groups.

Fortunately, more than four in 10 employers plan to bring in targeted support to help over 55s with their retirement planning while over two thirds already offer or plan to provider pre-retirement planning.

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