5 Pension Mistakes to Haunt Your Retirement Plans

12th October 2023

If you make a mistake with your pension, you could end up paying for it later. To help you make the most of your pension, make sure you don’t fall for these 5 pension mistakes that could haunt your retirement plans.

#1 Don’t overlook the opportunity to trim your tax bill

Whenever you pay into a pension, you’ll get a top up from the government in the form of tax relief – cutting down your tax bill one payment at a time.

If you are a UK resident under 75, you can usually pay in as much as you earn, up to £60,000 a year and get basic-rate tax relief (20%). Even children and other non-taxpayers can contribute up to £3,600 (you pay £2,880, the government adds £720 in tax relief).

If you pay higher-rate tax (40%) you can claim up to an additional 20% in tax relief through your tax return or local tax office. If you pay additional-rate tax (45%), you can claim back up to an extra 25%. You must pay enough tax at the relevant rate to claim back the full amount. Different income tax rates and bands apply for Scottish taxpayers.

Come January, when most tax bills need paying, you might be grateful for the extra money you can claim back because of the contributions you make now.

#2 Don’t get caught in the snare of not saving enough

We all have dreams about what our retirement might look like, yet the majority of us don’t know how much to save for the income we might need or want when we finally retire. In fact, research suggests that 77% of savers don’t know how much they’ll need in retirement.

Once you have decided how much income you might need or want in retirement, it’s a good idea to check if your pension is on track. Our wealth calculator can help you to understand your current position and if you may need to make some changes.

Try our wealth calculator here >>

#3 Don’t allow investment decisions to hinder your pension contributions

Making a pension contribution and securing your allowances and tax relief each tax year doesn’t mean you need to rush into making investment decisions. Sometimes our clients make a pension contribution, secure up to 45% (or 47% for Scottish tax payers) tax relief before the deadline and decide where they want to invest later.

Please remember that although there is the potential for growth, investments can go down as well as up in value, so you could get back less than you put in.

#4 Don’t leave your pension contribution to the last minute

Many people leave their pension contributions until the last few weeks in the tax year. But it could actually pay to make a contribution earlier.

Investing earlier gives you a better chance of reaching your goals sooner.
The longer your money is invested, the more time it has to grow.

Finding money to set aside into your pension isn’t always easy – especially if you have other financial commitments, but it can be done. You could try these saving habits:

Pay in more when a regular outgoing has come to an end

If you pay for something on finance, or you’ve finished paying off a debt, or mortgage, you could think about redirecting the regular cost into your pension. Even the smallest of increases can make a huge difference – especially over the long term.

Use a pay rise or bonus as an opportunity to save

It can be difficult to prioritise saving a percentage of your income each month, but you could use a pay rise or bonus as an excuse to save. Some employers even offer a bonus sacrifice. This works in a similar way to salary sacrifice. You can choose to give up some or all of your bonus and pay it into your pension. You’ll benefit by not having to pay National Insurance or income tax on the amount you give up.

#5 Don’t forget to use unused pension allowances

This can be particularly relevant if you’ve inherited large sums of money or if you’re a high earner. A pension rule lets you take advantage of any unused allowance from the previous three tax years – it’s called the carry forward rule. Let’s say the annual allowance was £40,000 for the three previous tax years, it means you could invest up to an extra £120,000 in your pension. Effectively, you’d pay in up to £96,000, with the government adding £24,000 basic rate tax relief to the pension. If you’d paid additional-rate tax on all of it you’d also be entitled to £30,000 further tax relief outside of the pension.

On 6 April 2023, the annual allowance for contributions to pensions increased from £40,000 to £60,000. This means that you can save up to £20,000 more in your pension including tax relief.

To use carry forward, there are two requirements:

1.You had a pension in each year you wish to carry forward from, whether or not you made a contribution (State Pension doesn’t count).

2. You have earnings of at least the total amount you are contributing this tax year. Alternatively, your employer could contribute to your pension.

Talk to an expert

If you have any questions regarding your plans for retirement speak to an adviser about your circumstances. We provide a free initial consultation and there is no obligation to work with us.

Call 01244 347 583 to speak to our team or complete the form below and we’ll come straight back to you.

Remember, this article is not personal advice. You can’t normally access money in a pension until at least age 55 (57 from 2028). Pension and tax rules can change, and benefits depend on your circumstances. If you’re not sure what’s right for you, please seek advice.

5 Pension Mistakes to Haunt Your Retirement Plans Source HL