Three steps to take now to protect your retirement income.
State pension age to be reviewed by UK Government amid fears that 45% of workers are not saving
A finance expert is warning people of all ages about the common pension mistakes they could be making and how to rectify them for a safer financial future.
This is becoming an evermore important topic due to the future changes to taxation by the UK Government, which will see pensions included as part of your estate, for the purposes of Inheritance Tax. Not being aware of these changes, along with other factors, could end up costing you thousands of pounds by retirement age.
To help avoid this, Antonia Medlicott, Managing Director of financial education specialists Investing Insiders, has shared three common pension mistakes you should be aware of.
READ MORE: Inheritance Tax rules simplified and why they could change at the Autumn BudgetREAD MORE: Money expert shares simple guide to tracking down lost pension pots worth around £9,500
Being in a poorly performing pension fund
Most pension providers will have multiple pension funds for you to invest your money in. Spend time researching the best-performing fund, and ensure that this is where your money is going.
You can discover where your pension is invested by reviewing your annual paperwork from your pension provider, or alternatively, you can log in to your online account and check there. Once you have found your pension, you can then compare its performance against other accounts. Changing can be simple; a lot of providers allow you to do it yourself via an online account; however, you can always contact them for help instead.
It’s estimated that over ten years, the performance gap between top and bottom decile funds is 5.5 per cent per year. With the average pension contribution being around £2,100 a year in the UK, this means you’d be £115.50 better off annually in a higher-performing pension fund. Over 10 years, this would be £1,155.
Don’t withdraw pension savings early
Withdrawing pension savings before the normal retirement age, or being 55 (57 from 2028), can result in severe tax penalties. It’s seen as an ‘unauthorised payment’ which HMRC charges 55 per cent tax on.
However, when you wait for retirement, you get benefits like 25 per cent of your pension pot being tax-free, with the rest depending on what rate it falls in. For example, if you decided to withdraw £30,000 from your pension pot early, you’d end up paying £16,500 in tax. But waiting until at least 55 will result in the taxman only seeing £4,500, a crazy £12,000 saving.
Forgetting about Inheritance Tax pension changes
From April 2027, pensions will become a part of someone’s estate and, therefore, be subject to Inheritance Tax (IHT).
One way to minimise this is to take advantage of IHT gift rules, which allow for annual gift allowances, as well as larger sums of money, as long as the subject survives at least seven years after.
Doing this will reduce the amount of tax that you will pay after your death, as you can gift £3,000 per year tax-free to one person, then up to £250 to multiple different people. This reduces the overall amount of inheritance tax you will have to pay, as ultimately there will be less money in your ‘estate’. The amount you save depends on how much you gift and how much you already have in your pot.
In the UK, the average amount left in a pension pot when someone dies is between £50,000 and £150,000. So if someone dies with £100,000 unused, assuming that they also had the national average estate at death of £335,000, of that £100,000, £30,000 would then be paid in tax.
Antonia said: “Pensions are an important part of all of our futures, so it’s important that we are aware of the common mistakes that could lose us money. With some of these being as simple as not withdrawing your pension before a certain age, make sure to keep yourself informed about any future pension changes, as recent trends seems likely.”