Now that you’re retired, you can finally reap the benefits of saving into a pension your whole life. Without a boss to worry about or any rules to follow, you can enjoy the retirement you’ve always imagined for yourself. But, before you get carried away and risk undoing decades of hard work, there are a few things to bear in mind. Here are five of the most common mistakes to avoid in retirement.
1. Taking too much of your pension too soon
Even if you only have a modest pension pot, gaining access to it can feel like winning the lottery. Pensions are often out of sight, out of mind so when you’ve suddenly got thousands of pounds to your name, it can be easy to withdraw more than you actually need.
There’s a reason why the age you’re able to access you private pensions is set to rise to 57 in 2028. People are living longer and savings accessed in our 50s may need to last us into our 80s – and perhaps beyond. Taking your pension early or withdrawing too much too soon can have a dramatic impact on your overall pension pot size and how long it will last. And, once you’ve withdrawn all of your pension there’s no getting it back.
2. Not understanding how pension tax works
As per the new rules introduced in 2015, you can take up to 25% of your pension as a tax-free lump sum from the age of 55. Another option is to take the first 25% of each withdrawal tax-free. Whichever method you choose, only the first 25% is tax-free and you’ll need to pay pension tax on everything else.
All of the pension money you receive is treated like income and HMRC will charge you income tax at your usual rate of 20%, 40% or 45%, depending on how much you withdraw. You’ll get a tax-free allowance of £11,850 (for 2018/19) before tax is charged.
The more money you withdraw from your pension in any given tax year, the more tax you’ll have to pay. For this reason it’s important to be mindful of the pension tax rates and income tax thresholds, and consider spreading your withdrawals if you don’t need money urgently.
Pension tax isn’t optional or something you can sort out later. Instead it’s automatically deducted by your pension provider before each withdrawal is paid to you in the same way income tax is deducted from salaries by employers using PAYE. You’ll find more information about how pension tax is calculated on your pension statement.
3. Maintaining an expensive lifestyle you can’t afford
Just because you’re retired doesn’t mean you can’t have fun! But without the option of picking up overtime or pulling in extra cash another way, chances are the money you have now is going to be all you’ve got.
Getting to know your pension and its limitations is an important part of retirement planning. Before you withdraw pension lump sums and take risks with your savings, you need to figure out how much you can afford to withdraw each year to ensure you have enough to last for the rest of your life.
If your old salary far exceeds your retirement income you’ll need to make some adjustments – and soon. It’ll be impossible to maintain the same standard of living you had before, unless you’ve reached another financial milestone, such as paying off your mortgage, or will be reducing your overheads in some way.
You need to be realistic about what you can afford and what you’re prepared to sacrifice to ensure you don’t get left short in later life.
4. Forgetting about old pensions
Although you’ve already started drawing your pension, it’s possible that there could still be an old workplace pension that you’ve forgotten about somewhere. The days of a job for life are long gone and it’s likely that you’ll have had a few jobs throughout your career and could have easily lost track of a pension along the way.
In retirement every little helps, so if you think there’s some money that you could be missing out on it’s worth trying to find it. The government’s Pension Tracing Service can help you find an old pension, provided you remember either who the pension provider is or the name of your employer at the time. Should you choose to combine your pensions with PensionBee we can also find those old pensions for you - all we need is some basic info like a pension number or a provider name.
5. Being resigned to your financial fate
While it can be hard to dramatically improve your financial position in retirement, there’s usually something you can change – especially if you’re unhappy. No matter how far into retirement you are it’s important to check your pension statements regularly to see how your money’s being managed. If you find that you’re being charged high fees for the service you’re getting or don’t think your funds are being managed well, it’s quite straightforward to change pension provider.
Elsewhere, drawdown is one of the most flexible ways of taking your pension and also allows your money to stay invested until you need it.
This can be a great way to boost your pension pot when you’ve already retired, although investing your savings later in life does come with risks.
A key benefit of flexi-access drawdown is that you can always change your mind if you feel it’s not delivering the returns you were expecting or are concerned about the size of your pension pot. In contrast, when you decide to purchase an annuity with your pension you’ll be making a commitment that can’t be undone. That’s why it’s important to research the best annuity rates and consider all of your pension options before going down this route.
There are a number of pension providers that can help you regain control of your pension. PensionBee, for example, makes it easy to transfer your pension and can help you find any old pensions you might have lost. Managing your pension can be simple too, with an online pension dashboard and app, which lets you see your balance in just a few clicks.
Are you in retirement? What mistakes would you tell other retirees to avoid? Tell us in the comments.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
