09/10/207 scary pension mistakes to avoid this Halloween
The nights are drawing in and Halloween is around the corner but while you might get spooked watching a horror film this season, pension mistakes can be just as scary (and cost you far more). With that in mind, here are seven pension mistakes to avoid to keep your retirement on track.
1. Not claiming all the tax relief you can
You receive tax relief on your pension contributions. It means your savings grow faster. However, are you getting everything you are entitled to?
Pension tax relief is at up to the highest rate of Income Tax you pay. If you are a basic-rate taxpayer, a tax relief of 20% will be added to your pension at the source. So, you do not need to do anything about it.
If you are a higher (40%) or additional (45%) rate taxpayer contributing to a pension using the ‘relief at source’ method, you will need to apply for the extra relief by completing a self-assessment tax return, or an alternative for 40% taxpayers is to contact HMRC separately. If you haven’t been doing this, it’s possible to go back and claim tax relief for the previous four tax years. Failing to do this means you could be missing out on significant sums over time that could help you achieve retirement goals.
2. Failing to take advantage of additional employer contributions
All employers must now offer the majority of employees a pension, which the employer contributes to. If your pension scheme is based on your qualifying earnings, an employer’s contribution is a minimum of 3% of those earnings. This is a useful boost to your savings but it is worth checking if your employer will increase this.
Some employers, for instance, will match your own contributions up to a certain level. If this is the case, it is often worth increasing your own pension contributions as you will receive extra ‘free money’ to put towards retirement. Other firms may also offer a salary sacrifice on pension contributions, allowing you to reduce Income Tax and National Insurance, with your pension benefiting.
3. Exceeding the Annual and Lifetime Allowances
Exceeding pension limits can mean a larger tax bill than expected – scarier than the traditional haunted house!
It is important you understand what your Annual and Lifetime Allowance amounts are.
The Annual Allowance is the total amount you, and anyone else on your behalf, can tax-efficiently save into a pension each tax year. You can carry forward unused allowances from the three previous tax years if you held a pension plan in those years. For most people the annual allowance is £40,000, but for very high earners the figure can reduce to as little as £4,000. If you would like to discuss your Annual Allowance and how to make the most of unused allowances, please get in touch.
The Lifetime Allowance is the total amount you can save tax-efficiently during your lifetime into all of your pensions combined. For the tax year 2020/21, the Lifetime Allowance is £1,073,100 and it is expected to increase in line with inflation. The sum sounds like a lot but you need to consider that it will include decades’ worth of your contributions, employer contributions, tax relief and investment growth. And if you have any defined benefits (final salary scheme for example) these are valued at 20 times your annual pension, plus your tax free cash sum.
4. Triggering the MPAA without realising
It is not just your earnings that can affect your Annual Allowance either. If you start to take money flexibly from a money purchase pension, the total amount you, and others on your behalf, can pay in to money purchase pensions tax efficiently reduces to £4,000. This is called the Money Purchase Annual Allowance (MPAA).
If you access your pension at the point of retirement, the MPAA is unlikely to affect you. However, if you make withdrawals before retiring and then plan to continue contributing, it can limit how much you are able to save. It does not mean your pension savings have to remain inaccessible, but being aware and having a plan is crucial.
5. Withdrawing from your pension when you do not need it
Recent research from PensionBee found that just 3% of those considering accessing their pension were planning to retire soon. A further 26% planned to make a withdrawal to increase day-to-day income or purchase something special. However, the remaining respondents did not need their pension savings yet but were still thinking about making a withdrawal.
It can mean you need to compromise when you retire as your savings will be lower. If you are thinking of accessing your pension before retirement consider:
- What will you use the withdrawals for?
- Will it affect your retirement lifestyle in the future?
If you do not need your pension savings yet, for most people, leaving savings invested through a pension is the most appropriate option.
6. Not shopping around for the best Annuity deal
If you have a Defined Contribution pension, purchasing an Annuity is the only way to create a guaranteed income for life.
However, it is not as simple as choosing a provider and moving forward. There are many different options on the market and providers will offer varying rates. You should take the time to shop around and find the best deal for you. It could mean your retirement is more comfortable.
It is also important to look at the extra features on an Annuity that are important to you. For instance, some will provide an income linked to inflation, maintaining your spending power, or provide an income to your spouse or civil partner if you pass away.
7. Not taking financial advice at the point of retirement
Retirement comes with a lot of decisions to be made. And they could affect the rest of your life. Financial advice can build confidence and offer guidance at the point of retirement and beyond.
Seeking financial advice at the point of retirement can help you understand your assets and how they can be used with your goals in mind. Since 2015, pension savers have far more choice in accessing their pension, but it comes with more responsibility too.
Getting to grips with your pension now and avoiding common mistakes means that pension savings and retirement do not have to be scary at all, but something you look forward to. Please get in touch to discuss your pensions.
Please note: This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income can also be affected by the interest rates at the time you take your benefits.
The tax implications of pension withdrawals will be based on your individual circumstances, tax legislation and regulation which are subject to change in the future.