Britons warned of 'pension pitfalls' that may leave you thousands worse off in retirement

With the new year underway, those approaching retirement are warned about potential pitfalls that may limit their growth.

An expert has claimed avoiding “pension pitfalls” is key to making the most of one’s retirement planning.

There are five key pension pitfalls for Britons to avoid to ensure they do not lose out on thousands.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown said: “Avoiding pension pitfalls is key to making the most of your retirement planning. Claiming the tax relief you are entitled to sounds like it should be a given, yet £245 million a year remains in the Government’s coffers on average.

“Similarly, losing track of an old pension can leave you far worse off in retirement. Even the smallest pensions can grow and over time you could be missing out on a significant chunk of savings.”

1 Forgetting to claim tax relief

Pension savers missed out on £1.3 billion of tax relief in the five years to 2020/21. People can claim tax relief on their pension at their marginal rate and over time this can make a significant difference to how much goes into their pension but in some cases, people will need to claim on their tax return to get the full amount they are entitled to.

Basic rate tax relief will usually be added to one’s contribution but if they are a higher or additional rate taxpayer they may need to claim the extra 20 percent or 25 percent tax relief through self-assessment.

People won’t need to put in a claim if their pension is set up as a salary sacrifice arrangement.

If one’s pension is set up under a net pay arrangement, then the correct tax relief will also be taken. However, if their pension is set up under what is known as relief at source then they will need to claim the extra tax relief via self-assessment.

2 Not making best use of higher annual allowance and carry forward

Britons can save up to their annual earnings or £60,000 (whichever is the lowest) into their pension every tax year. They can also carry forward any unused allowance from the previous three tax years, as long as they aren’t contributing more than their annual earnings.

However, Ms Morrissey warned “there are caveats”.

She said: “If you are a high earner with an adjusted income of more than £260,000 per year and a threshold income of more than £200,000 per year, then your annual allowance will be lower.

“Under what is known as the tapered annual allowance, for every £2 your adjusted income goes over £260,000, your annual allowance for the current tax year reduces by £1. The minimum reduced annual allowance you can have in the current tax year is £10,000. These limits have changed in recent years so check how this affects how much you can put in.

“If you have already flexibly accessed your pension and are looking to rebuild it by making contributions, you will be limited under the money purchase annual allowance (MPAA) to £10,000 per year and you cannot use carry forward on unused MPAA in previous years.”

3 Setting and forgetting your contributions

She suggested Britons make a conscious effort to revisit their pension contributions to boost their retirement resilience. Increasing contributions every time one gets a pay increase or a new job can be a relatively painless way of getting more into ones pension.

It will also help future-proof their pension against the effects of inflation which can erode spending power over time.

4 Not making the most of your employer contribution

Ms Morrissey said: “Many employers stick to auto-enrolment minimums when it comes to their contributions but there are others who are willing to pay in more.

“Some will potentially hike them even further if you increase your contribution – a process known as employer matching.

“Over time this can make a huge difference to how much goes into your pension so if your employer offers it and you are able to take advantage you could really boost your pension prospects. In these cases, if an increase of £1,000 were matched, £2,000 would go into your pension at a cost of as little as £550.”

5 Losing track of old pensions

Britons are urged not to lose track of old pensions as this could leave people thousands of pounds worse off in retirement.

Research from the Pensions Policy Institute estimates there is £26billionn of lost pension money washing around the system so it’s a major issue that could be undermining one’s retirement.

Ms Morrisey suggests people should make a list of their old employers and make sure they have pension paperwork for each one. If they find one is missing, then call the government’s Pension Tracing Service and they will help them track down contact details.

She continued: “Once you’ve located your lost pension then it can make sense to consolidate into one place, such as a SIPP. Having an overarching view of what you have can help you make better decisions as well as cutting down on administration.

“Typically, you’ll improve your investment choice as well as make it easier to plan your pension saving. It’s important to check that you aren’t incurring any expensive extra fees or losing valuable benefits such as guaranteed annuities by consolidating though.

“It is also rarely a good idea to transfer a final salary pension scheme.”