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4 Pension Planning Pitfalls to Avoid

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This content is for information purposes only and should not be taken as financial advice. Every effort has been made to ensure the information is correct and up-to-date at the time of writing. For personalised and regulated advice regarding your situation, please consult an independent financial adviser here at Castlegate in Grantham.

Organising your pension ahead of time is arguably one of the most important and beneficial decisions you’ll ever make. For most people, their pension(s) will form the pillar of their retirement income, which has big implications for your financial security and quality of lifestyle once you reach later life.

However, effective pension planning is difficult to achieve without professional help – especially since the 2015 Pension Freedom reforms, which added an extra level of complexity to the UK pension landscape. Consequently, for such an important area of your wealth and finances, we recommend that you seek independent financial advice to ensure you have the information you need to make the best decisions for you and your family.

It helps, however, to be aware of some of the common mistakes people make when trying to plan their pension(s) for retirement. In this short guide, our financial advisers here in the Midlands will be sharing some of the most prominent ones we have witnessed. We hope this content helps you avoid such pitfalls and informs your thinking.


#1 Relying on the state pension

Many people believe that they will be able to live off their state pension. As a result, they might mistakenly think that no further preparations need to be made for their retirement income.

Whilst the state pension typically forms an important component of a wider retirement plan, it cannot be relied on in this way. In 2019-20, the full new state pension amounts to £168.60 per week; i.e. about £8,767.20 per year. This might sound like a large sum, yet consider that most people are likely to need at least 2/3rds of their pre-retirement salary to live comfortably once they finish their careers. So, if your salary is £40,000 as you approach your retirement age, then you might possibly need as much as £27,000 per year in retirement. That’s £18,232.80 more than your state pension can provide.

If you are living with your spouse or civil partner, then it is certainly true that you can combine your state pensions to increase your household income. However, please remember that you cannot usually “inherit” your partner’s state pension if they die before you. It is important, therefore, to ensure that your financial plan has effective contingencies in place should this occur, to help ensure that a surviving spouse/partner is not left financially vulnerable.


#2 Putting everything into property

Many people are attracted to property as an investment because it is an asset they can see, feel and easily understand. Our financial advisers in Grantham, therefore, often talk to people who consider putting their life savings into property, such as Buy To Let, and living off the rental income or capital gains from property sales in retirement.

It might sound like an attractive idea, but for most people this course will be financially unviable and fraught with risk. Most financial advisers recommend against putting all of your capital into one “asset type” (e.g. property), and instead promote “diversifying” across different assets in order to spread your risk.


#3 Leaving things too late

Compound interest is hugely important and powerful when it comes to retirement planning. Consider the following example, where £10,000 is invested at a 5% annual return over:

  • 10 years: £16,288.95
  • 20 years: £26,532.98
  • 30 years: £43,219.42

Naturally, this dynamic leads most financial advisers to caution against delaying saving towards your pension. The more time your capital has to grow, the more likely you are to reap a higher return when you reach retirement.

Starting early with your pension savings can also ease the strain of saving later. After all, suppose you want to build up a £300,000 pension fund with your contributions. Due to the power of compound interest, someone in their 20s will need to set aside far less of their monthly wage compared to someone who starts saving towards this target in the 40s.


#4 Forgetting about tax

Many people are under the impression that their income will not be taxed once they retire. In fact, your pension income is taxed under the same Income Tax regime you face during your career. In 2019-20, the first £12,500 of your annual pension income is usually tax-free under your Personal Allowance. After that, the Basic Rate is 20% up to £50,000.

Failing to recognise this and other tax implications of pension planning can lead many people to make erroneous estimates of how much they need to retire comfortably.

Another common mistake some people make is to assume that they can continue contributing into their pension, tax-free, whilst continuing in paid work whilst also drawing from their pension. Here, you need to be careful. Speak to your financial adviser to ensure that you do not unwittingly trigger the Money Purchase Annual Allowance, which reduces your tax-free annual contribution limit to £4,000.


Final thoughts & invitation

These are just a handful of common pension planning errors our financial advisers in Grantham have witnessed. There are many others and we could say much more on the area we have already discussed. The important thing is to consult an experienced, qualified financial adviser about your pension plan, well ahead of time.

Here at Castlegate, we can offer you a free, no-commitment pension consultation to help you clarify your strategy and goals. To get started, contact us on:

01476 591022