3 common pension mistakes that could cost you dearly and how to avoid them

“Knowledge is power” as the saying goes, and this is especially true when it comes to accessing your pension.

A report by Standard Life suggests that 43% of people over the age of 55 aren’t aware that most people can withdraw 25% of their pension tax-free. This lack of understanding of pension rules and options could lead many to make unwise decisions about their retirement savings that affect their long-term financial wellbeing.

Read on to discover three common mistakes to avoid when accessing your pension so that you can make sensible decisions about your retirement income.

  1. Exceeding the 25% tax-free lump sum

After the age of 55 (rising to 57 in April 2028), you are entitled to withdraw up to 25% of your pension pot tax-free. This is known as the “pension commencement lump sum” (PCLS). The PCLS is capped at £268,275, so if you have a very large pension pot, you may not be able to take 25% of it tax-free.

If you withdraw any pension funds above this threshold, the excess will be taxed at your marginal rate.

So, if you were to withdraw more than the PCLS in one year, your taxable income could potentially push you into a higher tax bracket than you’re used to. This could lead to you paying tax on a larger proportion of your pension income.

Moreover, by withdrawing a large lump sum from your pension savings and holding it in cash, you could be missing out on potential investment returns.

Though interest rates on savings accounts are now higher than they have been for more than a decade, most aren’t keeping pace with inflation. This means that, over time, the spending power of the money you hold in these accounts could fall, potentially making it more difficult for you to achieve your long-term financial goals in retirement.

So, it’s important to think carefully before withdrawing a large lump sum from your pension, particularly at the beginning of your retirement.

  1. Withdrawing more than you need each year

If you decide to use flexi-access drawdown, one of the challenges of taking an income from your pension can be calculating how much you need to take each year.

This is partly because your income needs may fluctuate from year to year.

At the beginning of your retirement, you might want to withdraw larger sums that enable you to achieve your big goals, such as travelling or pursuing new hobbies. Over time, your income needs might fall, as you tick off your goals and decide to spend more time at home. Later on, if you experience a deterioration in your health or mobility, you might need to withdraw more to cover care costs, which can be expensive.

This can make it tricky to know how much to withdraw each year, as you must balance your short- and long-term needs.

Withdrawing too much at the start of your retirement could cause a shortfall later on.

  1. Forgetting that you can continue to consult your financial planner throughout retirement

You may have been talking about and preparing for your retirement with your planner for many years, so when you do take the leap and finish working, it’s easy to consider that your financial plan has done its job.

This mindset overlooks the fact that you could spend 20, 30, or even 40 years in retirement, depending on how old you are when you finish working. As such, your financial planner can help you to manage your savings sensibly, ensuring that you have enough to cover your essential costs throughout retirement.

Moreover, your planner can help guide you through life events that could affect your retirement savings. Things like moving house, the birth of a grandchild, or losing a partner can all affect your retirement income and estate plan – not to mention external factors like inflation or changing interest rates.

By continuing to meet with your planner regularly throughout your retirement, you can feel confident that you’re making the most sensible decisions with your money after you finish working.

Get in touch

To learn more about how we can support you in accessing your pension and achieving your retirement goals, please get in touch.

Email us at info@bee-sure.co.uk, submit a contact form on our website, or call us on 0333 305 6692.

Please note

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.

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

Get in touch

Make an enquiry and a member of our friendly team will contact you to discuss.

Beesure Limited is authorised and regulated by the Financial Conduct Authority no. 832417.
Beesure Limited is a company registered in England and Wales. Company number: 10551333.
Registered office address: Ground Floor, Rowan House, Hazell Drive, Newport, NP10 8FY.

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