Article
Top five retirement mistakes to avoid
2 Oct 25 5 min read
Retirement is an exciting time with many things to look forward to and we want to make it even better. By highlighting five key areas where mistakes are often made and giving tips on each, we want to put you in a more informed position to make the right choices for your retirement.
1. Underestimating life expectancy
One of the most significant mistakes retirees make is underestimating how long they will live. With advancements in healthcare and living standards, it's not uncommon for a retirement to last 20, 30, or even 40 years – so you should try budget for your pension to last this long.
Failing to do so can result in outliving your savings and facing financial difficulties in your later years. To help avoid this, ensure your retirement budget accounts for a long retirement.
Top tip: Remember, if you use drawdown to access your pension it will remain invested. This means the value will change. Hopefully it performs well, which means you could withdraw more or it may last longer. But as with all investments, it could fall in value and be worth less than you put in.
2. Not maximising pension contributions
Contributing to your pension is one of the most tax-efficient ways to save for retirement. Unfortunately, not everyone takes full advantage of the tax relief and employer contributions available through their pension schemes. By not maximising your contributions, you could be missing out on a welcome boost to your retirement savings.
We don’t want you to leave yourself short, so consider how much you could afford to add to your pension and take advantage of any employer matching contributions to maximise your pension pot. You may also have the option of adding a lump sum to your pension and getting an uplift through tax relief (eg adding £10,000 could be boosted to £12,500 for someone paying tax at 20%). Please remember that tax rules can change and the impact of taxation and any tax relief depends on your circumstances, including where you live.
Top tip: Use our pension calculator and have a look the impact of changing the amount you add to your pension each month – you may be surprised.
3. Ignoring inflation
Inflation can erode the buying power of your retirement savings over time. It can be easy to underestimate the impact of inflation on daily living expenses. For example, consider how much your weekly food shop cost just 5 years ago compared to today. Now imagine how much it could be in 20 years time, as retirement could last that long, possibly longer.
Top tip: To help protect your pension from inflation, consider investing it in assets that have the potential to grow over time. Although please remember the value can fall too and be worth less than you put in. Also, it's a good idea to regularly review how much you're withdrawing from your pension and adjust it if you can.
4. Withdrawing too much too soon
When you first get access to your pension, it can be very tempting to go out and treat yourself. And why not? You’ve earned it by working hard and saving into it for many years. But, withdrawing too much from your pension too soon can lead to a rapid decrease in value and you run the risk of running out of money in retirement.
To help avoid this, consider how much it could be safe to withdraw each year. This can help make sure your pension lasts as long as you need it to. Remember, it may still be invested even when you start withdrawing from it. So consider what impact investment performance could have on your pension.
Top tip: You can potentially reduce the amount of income tax you pay by managing your withdrawals to stay within certain tax brackets.
5. Not staying on top of your investments
Where you're invested can have a big impact on the value of your pension. And depending on which option you choose for taking your money, it may remain invested for your full retirement. Therefore, it’s vitally important to make sure you’re invested in the right place for you.
The right investment isn’t always about chasing the biggest returns though. It’s about finding the right level of risk you’re comfortable taking. And your attitude to risk probably won’t stay static. For example, many people are willing to take more risk with their pension when they’re younger as they have longer to make up any drops in value.
It can also change depending on how you plan to take your money. For example, someone who is planning on buying an annuity may take less risk as they get closer to retirement. The reason for this is if you experience a sudden drop in value at this point, buying an annuity would lock in that loss and you’d get a reduced income for the rest of your retirement.
Top tip: Have a look at where you’re currently invested and consider if it’s right for you. Many people are invested in a lifestyle fund. This is an option that normally reduces risk as you get closer to your retirement date. The problem with these options is the retirement date on your pension may not be when you actually plan on retiring and if you’re moving into drawdown then a very low risk fund may not be the best option.
Don’t make the mistake of not getting professional financial advice
Some of the topics we’ve covered in this article are just the tip of the iceberg and there are many more things to consider. Retirement planning is a complicated topic and it’s not always clear what the right thing to do is. Unfortunately many people make the mistake of going it alone when they really don’t need to.
Our professional financial advisers, can give you the pension clarity you need. Our advice is straight forward, easy to understand and we explain our recommendations in plain English. To start making your pension plans clearer, simply click the button below and speak with one of our retirement experts today.