Revealed: 5 top pension mistakes and solutions to help you avoid them

Following years of hard work, your retirement is a chance to relax and unwind. Yet, achieving your long-term financial goals requires careful planning.

A well-executed plan could mean an early retirement and your dream lifestyle for the rest of your life. But falling foul of pension mistakes could have far-reaching implications.

So, keep reading to find out some of the most common pension mistakes to avoid as you navigate your way to a smooth and comfortable retirement.

1. Losing track of old pensions

According to a report by The Actuary, an incredible £50 billion worth of pension savings are at risk of being lost or forgotten.

More and more people are losing track of past pensions as a result of increased job mobility. Analysis suggests that young workers today could collect an average of five different workplace pension plans by age 68.

Solution – Track down previous pension plans and consider consolidating them into one easy-to-manage scheme.

If you think you may have misplaced previous pension schemes now is a good time to track them down. The government’s Pension Tracing Service may prove helpful.

Once you’ve tracked down all your pension plans, it might be worth consolidating them into one scheme. This could provide you with more investment choices, lower charges, and, potentially, better performance.

Consolidating several schemes into one isn’t the right choice for everyone, so we’d always recommend you seek advice to find out if it’s suitable for you.

2. Accidentally triggering the Money Purchase Annual Allowance

If you’re enjoying the benefits of a phased retirement, you may be working part-time, or in a consultancy role, while still making pension contributions. You’ll likely be benefiting from tax relief on your contributions and your employer may also be paying into your fund.

However, if you’ve also started to draw flexibly from your personal pension, you may have triggered the Money Purchase Annual Allowance (MPAA).

If you've never heard of this before, you're not alone. Indeed, research from Canada Life showed that 62% of over-55s have never heard of it, and only 4% understand what it is and how it works.

For most earners, the pension Annual Allowance is £60,000 (for the 2024/25 tax year). This allows you to contribute a total of £60,000 in your pension pot each year while still benefiting from tax relief. However, once the MPAA is triggered, this allowance falls to £10,000.

You’re likely to trigger the MPAA if you:

• Take all or part of your DC pension pot as a lump sum (though there are different rules for small pots)
• Move your pension pot into a flexi-access drawdown and start taking income from it
• Buy an investment-linked or flexible annuity

Solution – If you’re taking a phased retirement and fear you may trigger the MPAA, get in touch.

Depending on your circumstances, triggering the MPAA may not negatively affect your retirement goals.

If you plan to continue working while also flexibly drawing money from your pension, you could still contribute to your pension while still receiving tax relief – but be careful not to exceed the £10,000 limit.

3. Assuming your outgoings will be uniform throughout retirement

Whatever your desired retirement lifestyle, it’s important to remember that your income needs will likely fluctuate over the course of your retirement.

Indeed, each stage of retirement will require a different amount of money:

• On the go – During the early stages of retirement, there's a strong chance that you'll spend more on travel, hobbies, or home improvements
• Slowing down – While you may be slightly less active, you're still busy with hobbies, but you may be less inclined to plan more adventurous, long-haul travel
• Coming to a stop – In later life, your mobility may be more limited, and you may require care

Solution – Think about your retirement in segments and consider how your spending could fluctuate as you age.

It’s essential to factor these varying costs into your plan, otherwise you could end up with a shortfall later in retirement. You should also consider the potential need to cover costs of later-life care, with contingencies for what happens to that money if care isn’t needed.

We can advise you on all aspects of pension planning to make sure you make the most of your pension opportunities. We’ll also help you to work out what you will need to do to ensure you can continue to live your lifestyle well into your retirement years.

4. Failing to consider who will inherit your pension

According to research from Canada Life, 46% of UK adults with pensions haven’t considered who they wish to inherit their savings. And more than half haven’t completed an expression of wish form.

This is a far bigger mistake than you might first think.

If you don’t complete an expression of wish form, your pension funds will most likely pass on to your “financial dependants”. This could mean your savings may be distributed in ways that don’t align with your wishes.

Also, since pensions usually fall outside of your estate for Inheritance Tax (IHT) purposes, your pension savings could be a valuable asset to pass on to your beneficiaries.

As such, depending on your circumstances, using your non-pension assets to provide your retirement income first and leaving your pension untouched could be worthwhile. You could then potentially pass these funds on to your beneficiaries without them having to worry about paying IHT.

Solution – Make sure that your expression of wish form has been correctly filled out and is kept up to date if circumstances change.

If you’re not sure whether you’ve taken appropriate steps to ensure your pension assets are passed on to your loved ones correctly, please get in touch.

5. Not taking financial advice

The key to building a healthy pension pot is in the planning, coupled with regular reviews of your personal circumstances.

We can advise you on all aspects of pension and retirement planning to ensure you make the most of your opportunities. We can also help you to understand what you’ll need to do in order to continue to live comfortably well into your retirement years.

Solution – Ensure that you have regular reviews of plans with your financial planner and make sure they are completed at least annually, as this will be a wise investment of your time.

We can give you expert financial advice, individual to you and based on your unique circumstances, whatever stage you are at.

Get in touch

We can help you avoid pension mistakes and develop a retirement plan to suit your financial needs and lifestyle goals. To find out more, please get in touch.

Email info@doddwealthcare.co.uk or call 01228 530913 / 01768 864466.

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. 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. The Financial Conduct Authority does not regulate estate planning, tax planning, or will writing.