Seven top mistakes you can make with your pension

When it comes to preparing for retirement, your pension is likely to be one of the most valuable financial assets you have. Yet, despite its importance, many people make costly errors when managing their pension savings -mistakes that can have lasting consequences on their financial wellbeing in later life. With increasing responsibility placed on individuals to navigate complex pension rules, it’s more important than ever to make informed decisions.

Arrange your free initial consultation

1. Not saving enough during your working life 

One of the most common missteps is not saving enough in the first place. While auto-enrolment has brought millions of UK workers into workplace pensions, many contribute only the minimum amount required. Typically, this is 8% of your qualifying earnings split between employer and employee, but this may not be enough to fund the kind of retirement you’re hoping for.

A comfortable retirement often requires more than the minimum, and yet many workers never increase their contributions, even when their circumstances improve. Delaying pension saving or pausing contributions, even for a short period, can also have a disproportionately large effect on your final pension pot due to the compounding effect of long-term investment returns.

2. Consolidating without checking the small print

Pension consolidation itself can be both a solution and a problem, depending on how it’s done. Bringing together multiple pots can help you keep track of your savings and possibly reduce overall charges. However, some older pensions may come with valuable benefits, such as guaranteed annuity rates or protected tax-free cash, which can be lost if transferred. It's essential to understand what you're giving up before making any decisions.

3. Ignoring the impact of charges

Overlooking the impact of charges is another critical mistake. Charges on pensions might seem small, but over time they can eat away at your savings. Workplace pensions tend to have lower fees, often under 0.5% annually, due to charge caps on default funds. However, those who decide to transfer their pension into a Self-Invested Personal Pension (SIPP) or another non-workplace scheme may end up paying much more, sometimes more than 1% per year in management fees.

While these products can offer more control and investment choice, the higher costs can reduce your returns significantly. Before consolidating or transferring pensions, it’s important to weigh the benefits of simplicity and potential performance against the cost of higher fees.

4. Accessing your pension too early

Another pitfall is accessing your pension too early. While pension freedoms introduced in 2015 give you more flexibility, just because you can access your pension from age 55 (rising to 57 in 2028), it doesn’t mean you should. Many are tempted to dip into their pension pot to fund large purchases, help children financially, or simply to enjoy a bit of financial freedom.

However, withdrawing money early means missing out on years of potential investment growth and compounding, which can significantly reduce the size of your eventual retirement fund. Moreover, accessing your pension too soon could result in a pension pot that doesn’t last as long as you do, leading to financial insecurity in your later years.

5. Paying unnecessary tax on withdrawals

Tax is another area where pension savers often get it wrong. Taking large lump sums in one go can inadvertently push you into a higher income tax bracket. For instance, only the first 25% of your pension withdrawal is tax-free, subject to protection and the lump sum allowance (LSA). The rest is treated as taxable income and added to your annual earnings, which can quickly lead to a higher rate of tax being applied.

Many people fall into the trap of taking more than they need, unaware of the tax implications. Others may not realise that once they start drawing income from a defined contribution pension, their annual allowance for further tax-relieved contributions drops from £60,000 to just £10,000 under the Money Purchase Annual Allowance (assumes they were not already subject to tapering). This can be a nasty surprise for those who continue to work or return to employment and wish to keep contributing.

6. Using your pension as a rainy-day fund

There’s also the risk of relying too heavily on your pension to cover all future expenses. While it’s true that pensions offer favourable tax treatment and most can currently be passed on free of inheritance tax (although this is due to change from 2027), they shouldn’t always be your first port of call when you need money. Using other savings or investments first could give your pension more time to grow and preserve its value for the long term.

7. Not enjoying the fruits of your labour 

The fear of running out of money in retirement can hold you back from enjoying the fruits of your labour. It’s by far the most common concern, worrying if you’ve enough money to see you through your retirement years. From paying your household bills and maintaining the lifestyle you want, to being able to afford the potential one-off larger expenses such as cars, home repairs or holidays.

The key to peace of mind and a stress-free retirement, is planning. Planning allows you to spend the money you have saved without fear that you’ll run out. Knowing how long your money will last and how much you can afford to spend is vital. That switch from using income to build capital to using capital to provide income can be daunting.

It’s essential to make sure you plan as early as you can, to forecast if the money and assets you have set aside for your retirement will be enough to see you through.  At TPO we use a tool called Cash Flow Forecasting. It gives you control over your finances so you can live comfortably now, be prepared for unexpected expenses, or changes in circumstances and still have a secure future to look forward to.

Why financial advice is worth considering

In an increasingly complex pension landscape, the temptation to make quick decisions - whether it’s to access funds, switch providers, or pause contributions, is understandable. But these decisions can be hard to reverse and may come with long-term consequences. Many people find themselves navigating these choices without a clear understanding of the rules, which can result in missed opportunities or unnecessary losses.

This is where financial advice can be invaluable. A regulated financial adviser can help you understand your options, avoid common mistakes, and build a retirement strategy that suits your personal circumstances and long-term goals. While there may be a cost to getting advice, it can more than pay for itself by helping you avoid the pitfalls that erode your pension over time.

Pensions are too important to leave to chance. By taking the time to plan carefully, staying informed about your options, and seeking advice where needed, you can avoid these common mistakes and give yourself the best possible chance of enjoying a financially secure and fulfilling retirement.

Arrange your free initial consultation

The information in this article is based on current laws, taxation and regulations which are subject to change as at future legislations.

This article is intended for general information only, it does not constitute individual advice and should not be used to inform financial decisions.

A pension is a long-term investment. The fund value may fluctuate and can go down. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation.

The Financial Conduct Authority (FCA) do not regulate estate or cash flow planning, or tax advice.