Pensions are one of the most tax-efficient ways to save for retirement, but there are common mistakes that can significantly reduce what you end up with. Here are five of the most costly ones to watch out for.
1. Not Checking Your State Pension Record
Many people assume they will receive the full State Pension, but gaps in your National Insurance record can mean you receive less. Common causes of gaps include time spent abroad, career breaks, self-employment where Class 2 NI was not paid, or periods of low earnings.
You can check your NI record for free on the government website. If you have gaps, voluntary contributions (currently £824.20 per year for Class 3) can fill them. Each qualifying year adds approximately £342/year to your State Pension — paying for itself within about 2-3 years of retirement.
2. Losing Track of Old Pension Pots
The average person in the UK has 11 different employers during their career. Each employer may have contributed to a different pension scheme. The Pensions Policy Institute estimates there could be over £26 billion in "lost" pension pots.
If you have changed jobs and are not sure what happened to an old pension, you can use the Pension Tracing Service (free, run by the government) to track down lost pots. Consolidating old pensions into one place can make them easier to manage, though it is worth checking for any valuable guarantees before transferring.
3. Only Paying the Minimum
Auto-enrolment ensures most workers are saving something, but the minimum 8% contribution (including employer's share) is unlikely to provide a comfortable retirement on its own, especially if you start saving later in life.
A commonly cited guideline is that you should aim to contribute half your age as a percentage of your salary (when you start saving) into your pension. So if you start at 30, aim for 15% of salary. This includes employer contributions.
Even small increases in contributions can make a big difference over time. Increasing your contribution by just 1% of salary each year — for example, when you get a pay rise — is a relatively painless way to build a larger pot.
4. Ignoring Your Pension Investments
Many people set up their pension and never look at where the money is invested. Default funds are designed to be suitable for a broad range of members, but they may not be right for your specific situation, risk tolerance, or time horizon.
It is worth reviewing your pension investments at least once a year, especially as you approach retirement when you may want to reduce risk. If you are decades from retirement, being in a fund that is too conservative could mean missing out on growth.
5. Accessing Your Pension Too Early
From age 55 (57 from 2028), you can access your defined contribution pension, but just because you can does not mean you should. Taking money out early means:
- Less money left to grow through investment returns and compound growth
- If you take more than your 25% tax-free lump sum, the rest is taxed as income
- If you flexibly access your pension (drawdown), your annual allowance for future contributions drops to £10,000 (the Money Purchase Annual Allowance)
Before accessing your pension, consider whether there are other options and get a clear picture of how long your money needs to last.
Important: This article is for general educational purposes only and does not constitute financial advice. Tax rules can change and individual circumstances vary. If you need advice tailored to your situation, please consult a qualified, FCA-regulated financial adviser. You can browse advisers in our adviser directory.