Five Scary Pension Pitfalls

It’s that time of year again, and as the evenings draw in and the nights get colder, Halloween is truly upon us.?But whilst the ghosts and ghouls may roam on all hallows eve, there are far scarier matters to be frightened of – those relating to your pension.

Many savers simply make their regular contributions in the mistaken belief that’s all they need to do, but there are some scary pitfalls in paying no further attention until retirement approaches at which point it may be too late.

Here are five potential pitfalls and how to avoid them.

Losing out on tax relief

The Government pays tax relief on all pension contributions ranging from 20% to 45% depending on your rate of tax.?If your tax relief is paid ‘at source’ you automatically receive 20% relief when you pay into your pension but if you’re a higher rate taxpayer, you will need to claim your additional relief via your tax return.?

Losing out on employer contributions

If you are not yet enrolled into your employer’s scheme it is likely that you could be missing out on valuable contributions. If?you are already receiving employer contributions, your employer will be making at least the minimum, currently 3% of your pensionable earnings.?However, some employers will increase their contribution to match your own but capped at a certain level.?If you can afford to increase your monthly contribution it is worth asking your employer if they will increase theirs.

Accidentally incurring tax charges

There are limits on how much you can pay into your pension each year and also during your lifetime. If you exceed these limits, you will likely incur a charge on the excess once you start drawing your pension, leading to a potentially scary tax bill. Currently this is a hefty 55% for cash withdrawals and 25% on income.?For the current tax year (2021-22) the lifetime limit is ￡1,073,100 and the annual limit is ￡40,000, although this is reduced even further for those with adjusted income of ￡240,000 or more.

Losing out to the increase in the minimum pension age

Effective 6th April 2028 the minimum pension age will increase from 55 to 57 and if you were born after 6th April 1971 you will have to await an extra 2 years to access your pension. The Government has yet to finalise the details but if you are invested in a pension scheme that tracks the government minimum pension age (MPA) you may wish to consider transferring to a scheme with a lower stated retirement age. The government has provided a window for such transfers until 5th April 2023.?

Losing out due to not taking financial advice

The rules around pensions are complex and individual circumstances vary considerably but taking financial advice will provide ways to not only minimise the amount of tax you pay but also maximise the value you gain from your hard-earned savings.?A financial adviser will help you navigate the rules, such as the scenarios outlined above, and give you tailored advice enabling you to feel in control of your finances and improving your overall financial security.

We offer a 30 minute connection call where we can find out more about your situation and how best we can help you.?Drop me a line and we can set this up.

Information within this document is based on our current understanding and can be subject to change without notice and the accuracy and completeness of the information cannot be guaranteed. It does not provide individual tailored advice and is for information purposes only.