7 pension mistakes to avoid before you retire

A pension is a key way to save for your retirement but there are several common mistakes that could mean you end up with less money for your golden years than you need or expected.

Retirement living costs can be higher than you think. The latest data from Pensions UK shows the cost of a comfortable retirement has increased from £43,900 annually for a single person to £45,400 over the past year.

That means you may need both your state pension and any workplace or private pension scheme to help fund your retirement.

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The problem is that most of us don't think about our retirement savings until we are close to retiring - but taking steps as early as possible could help avoid some of the common pension mistakes that could cost you in the future.

Whether you plan to keep working or finally take that round the world trip when you retire, the actions you take now could affect your golden years.

That is especially important with changes due on the inheritance tax treatment of pensions from April 2027. Retirement savings will form part of an estate for inheritance tax purposes from April 2027, meaning some may be tempted to access more of the money earlier, but this raises the risk of the fund running dry.

Additionally, once you retire, the bills won’t stop. You will still need income to cover expenses such as energy bills, council tax, grocery shopping as well as maintaining your own lifestyle.

Many retirees may carry on working to fund their lifestyle or could even use savings or a buy-to-let portfolio.

We look at the seven pension mistakes to avoid to help give you a financial boost for when you stop work.

1. Don't underestimate the cost of retirement

Ever wondered how much pension you need to retire comfortably? The fact is, most people significantly underestimate just how much they would need to maintain their desired lifestyle.

According to Pensions UK, this is what you need:

• Moderate retirement: a single person would need around £32,700 after tax a year to achieve the minimum living standard in retirement. It’s £45,400 for a couple
• Comfortable retirement: A single person would need £45,400 and it’s 62,700 for a couple after tax

Analysis by Quilter suggests a single person would need a pension pot of £691,000 to meet the standards for a comfortable retirement.

This falls to £413,000 for a moderate lifestyle, while the minimum standard can largely be met by the state pension alone, with only limited additional savings required.

For couples, the cost is lower per person due to shared expenses but still requires substantial savings. To reach a comfortable standard of living, each partner would need a pension pot of £389,000, while a moderate lifestyle would require £208,000 each, Quilter says.

This is based on a 6.1% escalating annuity.

“People tend to think they’ll spend less when they retire, and it’s certainly true that some expenses will go down, such as commuting costs, but other expenses could well increase,” says Jeannie Boyle, chartered financial planner at EQ Investors.

A good first step is to think about your day-to-day spending and then consider other expenses such as extended holidays or obligations such as paying for the care of a relative or grandchildren.

“With many people enjoying a 20 or even 30-year retirement, the challenge is to make the most of it without running out of money,” adds Boyle.

“Budgeting, especially in the current climate, is a key part of retirement for most people.”

Doing a mid-retirement MOT could be a good idea, to make sure your finances are still on track.

2. Don’t lose track of your pensions

Workers have been auto-enrolled into pension schemes since October 2012 - and while this has been a successful way of making people save more, it has also resulted in people losing track of their pension pots..

You may have built up a collection of different pension pots if you have changed jobs several times during your career.

Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, says it is important to keep track of these as you could be missing out on vital income

“Data from the Pensions Policy Institute shows an estimated £26bn worth of lost pension money in the system with the average pension traced being around £9,000 so you could be missing out on retirement income by not tracking down these lost pensions.

“It’s well worth making a list of everyone you have worked for and making sure you have pension paperwork from all of them.”

We explain how you can track down lost pensions in our article.

The government is also planning to consult on 'pot for life' pensions that let you have one scheme for your employer to contribute to as you change jobs and move up the career ladder.

3. Don’t start too late

The earlier you start putting money in a pension, the more you can benefit from investment performance over the long-term.

This means riding out volatile times and benefiting from compounding, where your returns are automatically reinvested each year without you having to contribute more.

Pension contributions also get tax relief from the government - this means if a basic rate taxpayer puts £80 into their pension, they will receive £20 tax relief from the government, boosting the contribution to £100.

That covers the £20 tax a basic rate taxpayer would have been charged on £100 of earnings.

Plus, if you use a workplace scheme you will benefit from your employer matching your contributions.

The government’s latest Pensions Commission has also warned that many pension savers are sticking to the minimum levels of contributions when you could be better off by increasing how much you put in.

“Failing to maximise these benefits can result in losing out on 'free money' that can significantly boost your retirement pot,” says Rosie Hooper, chartered financial planner for Quilter.

“Pensions are one of the most tax efficient vehicles you can plough money into and the more you put in is often the more you get out.”

4. Don't rely on the default fund

When you save into a workplace pension, your money is usually automatically put into a default fund, the risk-appetite for which matches your age.

This is typically a balanced fund, but there are arguments that these do not always deliver the best returns.

“Investing too conservatively at a young age can be as detrimental as being too aggressive, Hooper warns.

This may mean looking beyond the default fund that your employer’s pension scheme chooses - but it is wise to seek advice before you go switching funds.

“This fund is often not matched to your unique objectives and risk appetite and therefore will not provide the best possible outcome.” It is certainly worth speaking to an adviser if you have specific goals. Find one at unbiased or vouchedfor.

For personal pensions, you should also monitor the cost of investing, such as fund or platform fees as this can eat into your returns and make sure your pot is diversified across different assets and sectors so that poor performance in one area doesn’t drag down all your savings.

It may be worth setting up a self-invested personal pension if you want more control of your retirement savings and are confident about building and managing your own portfolio.

5. Don’t rely on state and private pensions

Beyond your private retirement savings, you may also receive a state pension.

This is paid once you reach state pension age, currently age 66. Most people need 35 years’ national insurance contributions to get the full state pension.

It's worth getting a state pension forecast to check what you will receive and see if you could buy extra national insurance credits to boost the amount.

The full new state pension payments are currently £230.25 per week or £11,973 per year and could rise further due to triple lock rules.

This is a decent sum but it is unlikely to be enough to fund your golden years.

You could combine this with your own private pensions but even that may not be enough.

“Traditionally, we have thought about pensions as the primary way of funding this chapter of our lives and they remain the cornerstone of good retirement planning,” adds Boyle.

“But with limits on both the size of pension funds and the contributions you can make, as you plan for your retirement, you should consider that your income may come from a range of sources including your savings, investments, or even a rental property.”

Lots of people mistakenly start to draw from their pension instead of their other assets.

“Drawing on several sources can also help reduce the amount of tax you pay,” she says.

6. Don’t de-risk too early

Traditionally, people coming up to retirement would start moving out of risky assets such as equities and towards bonds to maintain the returns in their pension pot, known as lifestyling.

But higher life expectancies and pension freedom rules mean there are more flexibilities about how the money can be accessed and de-risking too early could mean missing out on a larger pot and ultimately more money.

There are options beyond taking an annuity, such as staying invested and making withdrawals through drawdown. You can also take 25% of cash tax-free but it is important to plan how you take your money so you don’t run out.

“If you retire at 60ish you will possibly have 30 years to live,” says Ben Yearsley, investment director at Shore Plymouth.

“You need your money to continue growing as you will need your income to carry on growing to combat inflation. In other words, stay in real assets such as equities for much longer than you think.”

Joshua Gerstler, chartered financial planner for The Orchard Practice, adds that leaving your money in cash or bonds for this length of period is likely to guarantee you run out of money.

7. Don’t underestimate the value of financial advice

Retirement planning can be complex, and getting it wrong can have severe consequences.

From everything to whether you should buy an annuity, defer your retirement to other elements having enough emergency savings - getting financial advice can put you in the strongest position.

“Many people neglect to seek professional financial advice and even if they do it is too late to make a real impact on retirement savings,” says Hooper.

“A financial planner can help you understand your options, guide you to make informed decisions, and develop a personalised retirement strategy that can help you achieve the retirement you aspire to.”

If you are over 50, a good starting point is the government-backed Pension Wise service provides free appointments to discuss retirement options.