Pension planning pitfalls

The retirement journey can be uncertain. However, with the correct planning, it can be a rewarding one. In this article, we will examine some common pension planning pitfalls that could affect your retirement outcomes.

When pension planning, there are a lot of issues outside your control. These include how much the cost of living will change and your state of health. Also, the journey has no fixed end date. In other words, nobody knows how long they will live.

In addition to making some complex retirement choices, it is essential to get as many details right as possible. At retirement and in the years immediately preceding and following, the decisions made can have a significant impact on the rest of your life. For instance, although flexibility can often be built in, some decisions are a "one-off" and cannot be reversed. As such, let us explore some of the most common pension planning pitfalls and how you can avoid them.

Not seeking advice until close to retirement

One of the biggest pension planning pitfalls is waiting too long to seek professional advice.Financial advice and pension planning are not only relevant to those nearing retirement.

Above all, support and advice when pension planning can be worth the cost. This is regardless of your age. A qualified Financial Advisor can provide you with a plan that is tailored to your personal means.

 As such, you will have peace of mind that your decisions are right for you and your family.

Delaying pension planning

One of the major pension planning pitfalls is delaying pension contributions when you are younger, which makes it harder to build up your retirement savings. Due to compound interest, the longer you delay, the more it will cost you to accumulate your retirement savings. Another option would be to delay retirement. Thus, allowing more time for your pot to grow.

As a rough guide, your potential pension pot will half every ten years you delay.

Not saving enough for the lifestyle you desire

Underestimating how much you need to save is also one of the frequent pension planning pitfalls that can leave you financially unprepared. Many people seriously misjudge the amount of income they will need in retirement.

On average, people want £13,400 a year to achieve a minimal living standard. £31,700 for a moderate standard and £43,900 for a comfortable standard of living. For couples, it is £21,600, £43,900, and £60,600.

Relying on the State Pension

The new full State Pension is £230.25 a week, and not everyone qualifies for this amount. For many people, this is not enough to live on. When pension planning, you might need to supplement this income. You can do this through a personal pension, a workplace pension (if you are employed), or both. In addition, you can utilize savings products, such as ISAs.

Not getting value for money

Fees can seriously affect the value of your pension. However, you can check the fees you are paying and compare them to those of other providers on the market. As such, you ensure you are getting value for money.

Not checking your pension pot regularly

Failing to monitor your pension pot is one of the most common pension planning pitfalls that could reduce your retirement income. Research revealed that 41% of people did not know how providers invest their pensions. In addition, when setting up a pension (personal or workplace), providers often allocate many people to the default fund.

These types of funds tend to swap equities for lower-risk assets as retirement approaches. This made sense when considering the purchase of an annuity. However, with flexible drawdown now available, pension savings can stay invested into retirement.

In the end, even a small difference can have a significant impact on the size of your pension pot. This is because performance can vary across investments.

Losing track of past pensions

When moving house or changing jobs, it is easy to lose track of old pensions. Experts estimate that people have lost £50 billion in pensions.

Therefore, it is essential to track down any old schemes. This is one of the most costly pension planning pitfalls.

Not maximising employer’s contributions.

If you are employed on a full-time basis, your employer will enroll you into a workplace pension scheme. Under the auto-enrolment rules, you will pay 5% of qualifying earnings. Your employer will pay an additional 5%. However, some companies are more generous and offer matched contributions. As such, if you can afford to increase your contribution to 8%, the employer will also contribute 8%. Therefore, when pension planning, if you can afford to make extra payments, it can be an excellent way of building up your pension pot.

Auto-enrolment may not include those on lower incomes. However, if you earn between £6,240 and £10,000 (2025/26) and request to join the scheme, they cannot refuse. In addition, they will have to make contributions as well.

Not using a pension to save tax

You receive tax relief on pension contributions based on your tax bracket. Although certain limits apply to the amount of relief, it is one of those rare occasions when the tax man gives you something back. It also represents an excellent investment opportunity.

Another major one of the pension planning pitfalls to avoid. Due to their lack of knowledge, many people fail to maximise their annual allowance, ultimately, missing out and potential tax relief. 

Relying on property or inheritance

For most people, property is their most significant investment. However, by deciding to use your property for retirement, you are, in effect, putting all your eggs in one basket.

Diversification, according to most investment specialists, is key to managing risk.

In addition, relying on an inheritance is an unreliable strategy. Life expectancy is increasing, and as such, many people will live well into their retirement years.

Get expert advice

When planning and trying to avoid pension potential pitfalls, seeking financial advice can be a valuable investment. For those who do not have the time or confidence to make their own decisions, a financial advisor can help you achieve your retirement goals.

Let Regulated Advice match you with a financial advisor for expert advice.