The expert explained how to measure your pension’s performance and explained the tens of thousands potentially at risk depending on when you access your funds.
Savers could unintentionally sabotage their pensions with common mistakes (Image: GETTY)
Pension savers are being urged to keep a close eye on their retirement pots, as simply stashing cash into the same fund may not secure your golden years and could be costing you tens of thousands, warns one expert. Antonia Medlicott, Managing Director of Investing Insiders, highlighted that the three most common blunders people make with their pension pots could set them back by more than £40,000, and some might not even realise until it’s too late.
She stated: “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.’’
Poor performance
Many experts recommend individuals to monitor their pension funds’ performance. But how can you determine whether your pot is performing well, average or poorly?
The expert clarified: “It might be the easy option to let someone else choose your fund for you, but our research shows it’s not always the best performing fund. 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. It’s estimated that over ten years, the performance gap between the best and worst performing 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.”
Withdrawals
Individuals can access their private pension funds from the age of 55, a full ten years before they can tap into their state pension. Withdrawing money prior to 55 is possible in certain circumstances but it may incur tax penalties. Medlicott added: “It’s seen as an ‘unauthorised payment’ which HMRC charges 55 per cent tax on, although many pension providers won’t let you withdraw your pension early except for ill-health or Protected Retirement Age.
“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.”
Changes to inheritance tax
Inheritance tax can be a complex and emotionally charged subject to tackle, but from April 2027 it will become an essential aspect of retirement planning as pensions will begin to be calculated as part of an individual’s estate upon their death. This could result in their beneficiaries facing higher inheritance tax charges if the funds aren’t judiciously utilised during retirement.
Medlicott advised: “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.
“It pays to plan well to mitigate the effects, as pensions being included in IHT rules further complicates what was already a complex area of tax law. One way to minimise this risk is to take advantage of IHT gift rules, which are exempt and allow for annual gifts of up to £3,000.
“It’s possible to gift larger amounts too, but these may be subject to IHT if the person making the gift then dies within seven years of making it. This reduces the overall amount of inheritance tax you will have to pay, as ultimately there will be less money in your ‘estate’, and only applies to estates worth more than £325,000, but does not apply if passing this on to a spouse or civil partner.”
