10 common retirement planning mistakes, and how to safely avoid them
There’s a lot to think about when planning for later life, from how you want to spend your time, to what methods you’ll use to financially support yourself.
While having a wide range of choices is a positive in allowing you to live the kind of lifestyle you want, it also means there are many pitfalls along the way. Indeed, many retirees end up falling victim to the same oversights when planning for their futures.
Fortunately, if you know about the errors others make, it can be easier to prevent them from affecting you and your wealth.
So, read about 10 of the most common retirement planning mistakes that many people make, and how you can safely avoid them.
1. Delaying saving for retirement
One of the most basic and common errors people make is to delay saving for retirement. Many individuals mistakenly think retirement is a long way off, and so delay saving until they are well on the way towards it.
Yet actually, saving earlier can be a sensible choice. The sooner you start saving, the more time you’ll give yourself to build your pot, and the longer your invested money will have to potentially grow in the market.
If you’re concerned that it’s now too late to start properly saving for retirement, remember the old adage goes: “The best time to start was yesterday. The next best time is now.”
2. Not saving enough
While you might have started planning and saving at an appropriate time, you may still not be saving enough for retirement.
If you’re setting aside a very small portion of your income each month, or only making the minimum contribution to your pension, you may not be saving enough for retirement.
It’s important to check that what you’re saving will provide a sufficient income in later life.
3. Not working out your goals for the future
The mistake of not saving enough also relates to another error, which is in not working out your goals for the future.
It’s all well and good to save and invest your money for retirement. But if you don’t know what you want to do with your time, it isn’t possible to know how much is really “enough”.
That’s why setting goals is so important. By having an idea of what you want to achieve in retirement, you can refine your planning and make sure it revolves around these targets.
This way, you can calculate a figure for how much you need to live your desired lifestyle.
4. Exceeding key pension allowances
While you may want to make the most of your pension, it’s important to be aware of the key allowances that limit tax-efficient saving.
For instance, you may need to keep an eye on the pension Annual Allowance, which limits how much you can tax-efficiently save into your pension each tax year. In 2023/24, this stands at the lower of £60,000 or 100% of your earnings.
However, if you are a high earner and your income exceeds certain thresholds, you may be subject to the Tapered Annual Allowance. This sees your Annual Allowance reduced by £1 for every £2 of adjusted income (i.e. all earnings, investment income, and pension contributions) above £260,000, down to a minimum of £10,000.
Furthermore, if you start to access your pension while continuing to work, you may be subject to the Money Purchase Annual Allowance (MPAA). This may see your Annual Allowance reduced to as little as £10,000 each tax year.
If you exceed any of these thresholds, you may end up with a larger tax bill than you might have been expecting.
Make sure you’re not infringing on key thresholds like this when contributing money to your pension.
5. Not checking that you’re set to receive the full State Pension
The State Pension can be a useful part of your retirement income. This is a guaranteed sum paid monthly that you can start to claim when you reach State Pension Age (66 in 2023/24, set to rise to 67 by 2028).
Currently standing at £203.85 a week, it also rises in line with wider economic circumstances each year, thanks to the government’s commitment to the “triple lock”.
Under the new State Pension, you need at least 35 qualifying years of National Insurance contributions (NICs) to receive the full amount.
However, if you have gaps in your National Insurance (NI) record, then you may not be entitled to this amount.
For example, you may have gaps in your NI record if you had earnings below certain thresholds in a given tax year, or lived or worked abroad during your career.
So, it may be worth completing a State Pension forecast to check whether you will receive the full amount.
You may be able to make voluntary contributions to top up certain years and fill in your record, ensuring you receive the full amount of State Pension available.
6. Overestimating the value of the State Pension
While the State Pension can be a useful part of your retirement income, it’s equally important not to overestimate its value.
As of 2023/24, the full amount you can receive is just over £10,600 a year. Realistically, this will not be sufficient if you have expensive future goals, such as travelling, going on regular holidays, or buying luxury items.
While it’s well worth checking that you’re going to receive the full amount of State Pension on offer, don’t assume that this alone will be enough to support your retirement lifestyle.
7. Not calculating how to be as tax-efficient as possible
It’s inevitable that you’ll have to pay some tax in retirement. Whether that’s Income Tax on the money you withdraw from your pension, or Capital Gains Tax (CGT) on investments you liquidate, you’re all but guaranteed to face some sort of bill.
This is something that many retirees ignore, when careful planning could have mitigated the tax charge they might have to pay in later life.
For example, thinking about how to use your 25% pension tax-free lump sum, or saving and investing in tax-efficient ISAs, could help you pay less tax so that you can make the most of the money you’ve diligently set aside.
8. Relying on an inheritance
Many people believe that they’ll be able to fund their retirement using an inheritance from a loved one, often their parents.
However, this is potentially a mistake for two key reasons:
- You can’t ever know exactly when you’ll have access to this money.
- Your inheritance may not be as significant as you expect – for example, if your parents require long-term care, this cost might eat into what you thought you were going to receive.
Receiving an inheritance can be useful for supplementing your retirement income, but you shouldn’t rely on it for achieving your goals.
It can be prudent to plan for retirement based on what you know you’ll have, and then treat an inheritance as an added bonus if you do ever receive one.
9. Stopping planning upon reaching retirement
A common mistake many individuals make is to stop wealth planning as soon as they reach retirement.
Having done all the preparation in the lead up, it can be easy to reach retirement and think the hard work is over. But actually, now that you’re drawing on your money, it’s still important to keep an eye on elements such as:
- Investment performance, and whether your portfolio is still suitable for your needs
- Whether you’re drawing too much from your pensions and savings
- How much tax you’re paying.
While the bulk of the planning often takes place before retirement, make sure you’re still carefully managing your money in this new stage of life.
10. Not taking financial advice
Perhaps the biggest mistake pre-retirees make is in not taking financial advice.
By working with a planner, you can be confident that your money is suitably organised to help you reach your goals for the future.
If you would like assistance planning for your dream retirement – or even help in making sure that you avoid these common retirement planning mistakes – then we can help at Britannic Place.
Email firstname.lastname@example.org or call 01905 419890 to speak to us today.
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
A pension is a long-term investment. The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Your pension income could also be affected by the interest rates at the time you take your benefits.
The Financial Conduct Authority does not regulate tax planning.