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The 10 biggest pension mistakes

Updated 20 December 2022

3min read

Nick Green
Financial Journalist

Turning down free money? Relying on property? These are two examples of 10 common mistakes people make when planning for their retirement, says Danny Cox.


1. Not saving enough

Almost four in 10 British adults don’t have a pension, including 1.4 million who are within a decade of retiring.

People want on average £24,300 a year to live comfortably when they retire. Yet in 2010/11 the average male pensioner had a pension income of £319 a week or £16,600 a year, according to the Office for National Statistics. That’s a gap of nearly £8,000.

2. Delaying saving

Quite simply, the longer you delay, the more it costs you to build a good-sized pension. This is because of ‘compound interest’, which Albert Einstein called “the most powerful force in the universe”. How much could delaying cost you?

Roughly speaking, every 10-year delay could reduce your pension pot’s potential growth by half.

This is because of ‘compound interest’, which Albert Einstein called “the most powerful force in the universe”

3. Not checking your pension pot

Research revealed more than two in five adults (41 per cent) – 8 million people – cannot remember how their pensions are invested.

Performance can vary quite dramatically across investments and even a seemingly small difference could have a significant impact on the size of your pot.

4. Not checking if you’re getting good value for money

Most people know how much they pay for their mobile phone, but not for their pension. Are charges eating away at your returns?

5. Relying on property

As the saying goes: an Englishman’s home is his castle. But it may also be his largest investment. If you decide to just use property as a retirement fund, you could be putting all your eggs in one basket. Investment professionals agree diversification is key to managing risk.
6. Relying on inheritance

A quarter of Britons rely on inheritance to fund their retirement but this is an unreliable strategy. The way life expectancy is shaping up, older generations are likely to live well into their retirement years.

7. Not taking up employer contributions

Companies, especially the large ones, usually offer workplace pensions. In many cases, they also offer to pay money into your pension. The good news is that by 2018 all companies in the UK will have to offer a pension to their employees. If you don’t join your company scheme you risk missing out on “free money”.

8. Assuming the state will provide for you

One in five people who retired last year will rely entirely on the state pension for their income. This is worrying when you consider the basic state pension will pay up to £110.15 a week. There is a proposal to replace the present system with a flat rate of £144 a week (in today’s money). Would that be enough to fund the retirement you want?

9. Not using pensions to save tax

Tax relief on pension contributions is one of those rare occasions when the taxman gives you something back. The government effectively pays 20 per cent of your total contribution (subject to maximum limits). If you pay a higher rate of tax, the government could in effect contribute 40 per cent or even 45 per cent in total. This means £2,000 in your pension could effectively cost you as little as £1,100.

There are also tools available to help you pinpoint areas where you could save money with tax, such as the unbiased.co.uk Tax Waste Calculator.

10. Not shopping around when you retire

When you retire, you can usually take up to 25 per cent of your pension as tax-free cash. After that, most people will take a taxable income from their pension. They usually do so by buying something called an annuity, although this isn’t the only option available.

Annuity rates can vary significantly, depending on the provider you choose and you can shop around to check which company offers you the best rate. As a result, when you shop around for your annuity, you could get considerably more income for the rest of your life. What’s more, there are over 1,500 medical and lifestyle conditions that could help you increase your annuity income.

If in doubt, take advice

Financial advice suits those who don’t have the time or confidence to make their own decisions themselves. If you have any doubts how to make the most of your pension and retirement planning, seek advice.

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>>>Read more about pensions

Please note: tax rules are subject to change over time, and the value of any tax benefits will depend on your personal circumstances. Also, the value of investments can fall as well as rise, so if you invest in a stocks and shares ISA you could get back less than you invested.

About the author
Nick Green is a financial journalist writing for Unbiased.co.uk, the site that has helped over 10 million people find financial, business and legal advice. Nick has been writing professionally on money and business topics for over 15 years, and has previously written for leading accountancy firms PKF and BDO.