6 Common Retirement Planning Mistakes to Avoid

Saving for retirement is probably your most important financial goal. There will come a point when you are no longer working and are reliant on the assets you have built up during your working life. This means unless you are a member of a very generous defined benefit scheme, you will need to take steps to plan for your retirement.

9th May 2024

Many people don’t think about this regularly, or put it off until later in life. But the earlier you start planning, the easier it will be to create your ideal lifestyle in retirement.

Avoiding some common mistakes is a great place to start.

Not Contributing Enough
On average, an individual needs at least £12,800 per year to achieve a basic minimum living standard in retirement. There is not a lot of room in this budget for luxuries, holidays, or spending money on hobbies. Most people will want to spend more than this, particularly if they are used to having more disposable income.

Bear in mind that the State Pension is currently £10,600, which is a good start, but doesn’t quite cover the basic living standard mentioned above. Most people are not contributing enough to achieve the lifestyle they want.

The following tips can help you make sure you are saving enough for retirement:

increasing your contributions or changing your retirement date.  

Investing Without a Plan
Investing can be complicated, particularly as we now have the entire investment universe at our fingertips.

Some common investment planning mistakes include:

While you can afford to make some investment mistakes early on, they can be difficult to recover from the closer you get to retirement.

A financial adviser can help you create a long-term investment strategy which is aligned with your goals.

Overfunding your Pension
Overfunding your pension can have tax implications and restrict your options later on.

Typically, you can make gross tax-relievable pension contributions of up to:

You can find out more about the limits and tax relief here.

The main risks of paying too much into your pension are:

While the Lifetime Allowance has now been abolished, there are still some limits on tax-free cash and tax-free death benefits.

If you are at risk of overfunding your pension, it may be worth seeking financial advice to find out other tax-efficient ways to invest.

Triggering Tax Penalties
An important tax trap to be aware of is the Money Purchase Annual Allowance (MPAA).

This means if you take flexible benefits from your pension, your future contributions will be limited to £10,000 per year. You will also lose the ability to carry forward.

The MPAA is not triggered if you tax tax-free cash, buy an annuity, draw a scheme pension, or if you take benefits from a pension which was already in capped drawdown prior to 2015. There are also special rules for small pots.

The MPAA could affect your retirement plans if you take benefits while you are still working, or if you retire but decide to return to work later on. You could miss out on significant amounts in future tax relief.

It’s a good idea to look at other options for supplementing your income or covering ad hoc spends before drawing on your pension.

Taking Benefits Inefficiently
Pensions grow tax-efficiently, and they are outside your estate for Inheritance Tax (IHT) purposes. This means it can be sensible to draw on other assets first, giving your pension longer to grow.

A common retirement planning mistake is to take too much, too quickly from a pension, possibly leaving cash and other investments untouched. Not only is this inefficient from a tax point of view, but it could also result in running out of money earlier.

Generally, less tax-efficient, lower risk assets should be drawn on first, for example:

  1. Cash
  2. Taxable investments, using allowances where possible
  3. ISAs
  4. Pensions

Not Reviewing Your Pension
Regular reviews are one of the most important aspects of financial planning. Circumstances can change and investments may perform differently from predictions.

It’s worth taking some time to review the following:

If you have multiple pensions spanning many years, it might be a good idea to contact a financial adviser for a review.

Please don’t hesitate to contact a member of the team to find out more about retirement planning.

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