1) Not knowing how much your state pension will provide
If you qualify for the full state pension, you’ll be entitled to £175.20 a week (in the 2020/21 tax year), but you’ll need to have contributed 35 years’ worth of National Insurance Contributions (NICs) to get this amount.
You must have made at least 10 years of contributions to get any state pension. To help you work out how much state pension you might get, request a state pension forecast on the government’s website
2) Outliving your savings
If you take out too much out of your pension too early, you risk running out of savings too soon.
‘It’s important to make cautious assumptions about your life expectancy and set a realistic withdrawal rate from your pensions, which will minimise the risk of your income becoming unsustainable in the later stages of retirement,’ recommends Martin Bamford, chartered financial planner at independent financial advisers (IFAs) Informed Choice.
The government has a useful tool
to help you work out how you’ll need to portion out your pension
3) Taking out lump sums from your pension without proper tax planning
There’s no tax payable on the first 25% of each withdrawal you make from your pension, but the rest is taxed at your marginal rate of income tax. That means if you take out big lump sums, you risk being landed with a hefty tax bill if the withdrawal pushes you into a higher tax band.
‘Consider spreading pension withdrawals across different tax years to take advantage of your personal allowance and try to keep any taxable withdrawals under the threshold where higher rate tax is paid,’ says Bamford.
4) Losing track of your pensions
If you’ve worked for several employers over the years and, in each case, joined the company pension scheme, it’s not always easy to keep track of all the different pension paperwork.
5) Exceeding the Lifetime Allowance
The Lifetime Allowance is a limit on the amount of pension benefit that can be drawn without triggering an extra tax charge. The current Lifetime Allowance is £1,073,100 (2020/21 tax year) and any excess attracts a tax charge of 25% if it’s withdrawn as an income, or 55% if you take it out as cash lump sum. Find out more about the Lifetime Allowance on the government’s website.
‘Breaching this limit isn’t so unrealistic for those who start saving early and achieve good investment returns – especially if they also benefit from generous employer contributions,’ says Patrick Connolly, certified financial planner at IFAs Chase de Vere.
‘To put the Lifetime Allowance limit into context, for somebody aged 65, a £1 million pension fund is likely to generate an index-linked income of less than £40,000 per annum – hardly enough to fund a lavish and extravagant lifestyle.’
6) Missing out on a higher pension income if you have a medical condition
If you have any kind of medical condition, such as diabetes, high blood pressure, or heart issues, and you plan to use some, or all, of your pension to buy an annuity or income for life, you should be able to get a higher income than those in the peak of good health.
‘Annuity income can be as much as 40% higher if you qualify for an enhanced annuity,’ says Bamford. ‘With low annuity rates, it’s so important to secure as high an annuity rate as possible, so disclosure of your medical condition is a must.’
7) Not taking account of the new lower Money Purchase Annual Allowance (MPPA)
The MPAA is a limit on the amount that you can pay into pensions if you’ve already accessed your pension benefits beyond your tax-free lump sum. The aim of the allowance is to restrict people ‘recycling’ money back into their pensions to take advantage of tax relief. In 2020/21 the allowance is £4,000.
‘It’s important to understand that some ways of accessing your pension benefits, such as taking your tax-free cash allowance or buying a lifetime annuity, won’t trigger the MPPA, whereas others, like taking income from drawdown, will,’ says Connolly. ‘It is therefore very important that people think long and hard before taking pension benefits and understand the full implications of doing so.’
Pensions can be complicated, especially with the many rules and regulations to get your head around. Getting expert advice will help you make the most of your pension savings – and really enjoy your retirement.
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