7 scary pension mistakes to avoid this Halloween

Halloween pumpkins on a wooden floorThe UK is officially into autumn and the nights will soon be drawing in.

Whether you’re carving pumpkins, stocking up on sweets for “trick-or-treaters” or picking out the perfect costume for your Halloween party, you’ll have plenty on your plate.

But this year’s scares could come from an unexpected source, especially if you’re not on top of your pension provisions.

You might be at the very start of your contribution journey, approaching retirement crunch time, or budgeting your pension withdrawals, but either way, there are some scary mistakes you’ll be keen to avoid.

Here are just seven of them.

1. Failing to start contributions early

The earlier you start contributing to your pension the better.

An early start gives you longer to save. This means more funds overall, the potential for higher investment returns, and more time for your money to benefit from compound growth.

A popular rule of thumb states that halving your age gives the percentage of monthly income you should be putting aside. Start contributing at age 20, say, and you should put around 10% of your income aside each month. Wait until you’re 50, though, and you’ll need to save roughly a quarter (25%) of your monthly income into your pension.

While contributing early is great, it’s important to remember that it’s also never too late to start.

2. Not making the most of your workplace pension

Auto-enrolment has made it easier than ever to contribute to a workplace pension.

Under current rules, the minimum auto-enrolment contribution stands at 8%, with 5% paid by you and the remaining 3% covered by your employer.

While the current cost of living crisis has seen 1 in 5 Brits cut pension contributions (according to the Guardian), those opting out of auto-enrolment are saving money in the short term, while passing up what is effectively “free” money. This could have serious consequences in the long term.

Rather than opting out, consider budgeting elsewhere. You might even find that if you increase your contribution, your employer is willing to increase their percentage too.

Tax relief is payable at the basic rate of 20% on your part of the contribution, whilst your employer could benefit from corporation tax savings.

3. Missing out on the tax relief you’re due

While tax relief is available automatically, at the basic rate, on all pension contributions, you might be eligible to claim even more.

As a higher- or additional-rate taxpayer, you can claim extra relief via your self-assessment tax return.

In February 2023, MoneyWeek confirmed that UK high-earners are failing to claim millions in extra tax relief each year. On average, higher-rate taxpayers leave around £245 million unclaimed annually, while additional-rate taxpayers are entitled to around £18 million a year more than is currently claimed.

Over the last five years, this has led to around £1.3 billion in unclaimed tax relief, a truly frightening figure.

If you are a higher- or additional-rate taxpayer, be sure to claim the extra relief you’re due.

4. Not matching your pension choice to your dream retirement

Pension Freedoms legislation, introduced in 2015, increased your retirement options and added an unprecedented amount of flexibility.

It’s now more important than ever that you think carefully about the type of retirement you want, and then match your choice to that lifestyle.

If you have plans for big-ticket items like world travel or expensive house renovations, a lump sum might give you easy access to the cash you need.

Equally, if you plan to downsize and take up a regular hobby, this might not require large, one-off outgoings. The regular income of an annuity might suit you best.

In reality, you’ll probably find a mixture of both works well, providing regular income to pay fixed, known expenses, and one-off lump sums for occasional luxuries.

The right option will be individual to you but be sure to take the time to prepare in advance so that you don’t make costly (and potentially scary) mistakes.

5. Withdrawing too much too early

With UK life expectancies rising, be sure to factor longevity into your retirement plans.

The Office for National Statistics (ONS) confirms that UK adults aged 65 in 2020 can expect to live for a further 20 years on average, rising to more than 24 years for females reaching age 65 in 2045.

With the UK minimum retirement age currently 55 (rising to 57 from 2028), your retirement fund might have to last more than three decades. That makes careful budgeting key.

This is especially true if you opt for a flexible option that allows you to withdraw money as and when you like. You’ll need to think carefully about how much you need, what happens to excess funds that you don’t immediately spend, and how market volatility might affect the price of the units you are drawing down.

6. Failing to factor in the cost of later-life care

According to the Health Foundation, longer life expectancies mean that more of us could be living with ill health in later life.

Factoring in the potential cost of later-life care is key to your long-term financial plans. We can help you to do this while putting a contingency in place for your funds if care isn’t required.

UK Care Guide confirms that care home fees are up 11% for 2023. Meanwhile, the government recently delayed the introduction of its social care bill to October 2025.

Failing to include care costs could cause you to run out of retirement funds when you need the money most.

7. Leaving your pension out of your estate planning

The chancellor used his Spring Budget to announce the abolition of the Lifetime Allowance (LTA). This was a limit on the amount of pension funds you could withdraw in your lifetime without becoming liable for a charge.

This charge has been lowered to 0% for the 2023/24 tax year and the LTA is expected to be scrapped altogether from April 2024.

This could mean that your pension becomes an attractive shelter from Inheritance Tax (IHT), and so a vital part of your estate planning.

Unused pension funds currently sit outside of your estate for IHT purposes so failing to think about your pension in this context could be costly.

Get in touch

If you think that your pension provisions might be haunted by any of these scary mistakes, Halloween is the perfect time to get the expert financial advice you need. So, who you gonna call?

Please contact us on info@janesmithfinancial.com or call 01234 713131.

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor.

Workplace pensions are regulated by The Pension Regulator.

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