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5 big pension mistakes 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, Lincolnshire or other local offices.

A single mistake with your pension can significantly hurt your retirement finances if you are not careful. One key reason for errors is that pensions can be complex, leading to misunderstandings. Indeed, one study found that half of UK adults find pension information “overwhelming”. As financial planners here in Grantham, one of our main goals is to make financial information (e.g. about pensions) more accessible – empowering clients to make more confident decisions about their money.

In this spirit, below we identify five common pension mistakes in 2023-24 and how to side-step them. We hope these insights are helpful to you. To discuss your own family financial plan with us, please get in touch to arrange a no-obligation financial consultation, at our expense:

01476 855 585

#1 Not setting your workplace pension strategy

When you start a new job in 2024 and you are eligible for auto-enrolment, your UK employer is required to make you a member of its workplace pension scheme. Every month, a bit of money from your paycheque will then be put into the scheme. Your employer is also obliged to contribute at least 3% of your eligible earnings.

Many workers do not check where this money is being invested. Typically, workplace schemes will offer a range of predefined “model portfolios” (e.g. “adventurous”, “moderate” and “defensive”). Members can choose one; if not, they may be placed into the moderate portfolio by default. This may, or may not, reflect your financial goals and needs. Make sure you check which options are available via your scheme.

#2 Not contributing enough

Many workers simply contribute the bare minimum (5%) to their workplace scheme believing this will be sufficient – along with their State Pension – to provide a comfortable future retirement. However, this is widely considered to be insufficient.

The Insitute for Fiscal Studies (IFS), for example, estimates that 90% of British workers face a “risky future” by not putting enough into their pension pots. For the IFS, a good benchmark contribution rate is 15%. Yet the target figure will vary by individual depending on your goals and circumstances. Seek financial advice if you are unsure about your pension contributions.

#3 Not checking the costs

Investing via a pension is one of the best “vehicles” for building tax-efficient growth for a retirement fund. However, not all pension schemes are made equal. Some are more expensive than others. This might be because they offer more investment choices (e.g. funds external to the provider). “Active” funds also tend to be more expensive than “passive” ones which track a market index like the FTSE 100.

It is important to think carefully about what you are willing to pay for. Here, a financial adviser can help narrow down fund choices which offer value for money. For instance, an active fund might justify its fees based on promises of better performance. Yet are these claims justified by the facts and fundamentals of the fund?

#4 Triggering the Money Purchase Annual Allowance

Every year, an individual can contribute up to £60,000 to their pensions each tax year (or up to 100% of their earnings – whichever is lower). This rule is called the “annual allowance”. However, your annual allowance can be dramatically reduced if you trigger the Money Purchase Annual Allowance rules (MPAA).

This is not necessarily a problem for someone who has carefully considered the MPAA rules with a financial adviser and is ready to fully retire. However, if you intend to continue contributing to your pension for the foreseeable future, triggering the MPAA will likely not be beneficial. Unfortunately, once triggered by an individual (e.g. by taking taxable income under flexi-access drawdown), the MPAA cannot be reversed.

In 2023-24, the MPAA limits an individual’s annual allowance to £10,000. Therefore, you should be certain that you are ready to trigger the rules beforehand (to avoid limiting your future contributions). Speak with a financial adviser about your options.

#5 Not planning your 25% tax-free lump sum

In 2023-24, UK pension rules state that an individual can withdraw up to 25% from their pension(s), tax-free, after reaching age 55. However, this is a very important decision with significant implications for your tax plan and future retirement income.

For instance, taking 25% out of a £500,000 pension would leave £375,000 in the pot. This would likely not allow for as high a retirement income compared to keeping the full £500,000 invested. Yet, for some individuals, taking some (or all) of their 25% tax-free lump sum could provide an opportunity to achieve other important financial goals – such as paying off the rest of the mortgage before retirement.

Given the stakes involved, we recommend getting professional advice to help ensure you make the most educated decisions about your tax-free lump sum. For example, you may wish to withdraw some of the amount at age 55 and make gradual withdrawals over future tax years.


If you are interested in discussing your own financial plan or investment strategy with us, please get in touch to arrange a no-commitment financial consultation at our expense:

01476 855 585