Many individuals in the UK risk losing over £40,000 due to three prevalent pension mistakes, according to financial experts. Research indicates that more than 10 million adults in the UK are “too busy” to address their pension planning. As changes to pension taxation approach on April 6, 2027, experts are urging individuals to pay closer attention to their financial futures.
The upcoming changes will classify most unused pension funds as part of an individual’s estate for Inheritance Tax (IHT) purposes. Previously exempt pension pots may now be taxed at a rate of 40% upon death, which could represent a significant financial burden for many families. Experts highlight that such changes could ultimately cost individuals thousands of pounds if not adequately managed.
Antonia Medlicott, Managing Director at financial education specialists Investing Insiders, emphasized the importance of being informed about common pension pitfalls. She stated, “Pensions are an important part of all of our futures, so it’s important that we are aware of the common mistakes that could lose us money.” Medlicott encourages individuals to stay updated on changes and to understand the implications of their pension decisions.
Common Pension Mistakes to Avoid
Experts have identified several key mistakes that can significantly impact pension savings. One notable error is failing to research and select the best-performing pension funds. Many pension providers offer a range of options, and it is advisable to compare different accounts to ensure the best possible returns. Data suggests that the performance gap between the top and bottom funds averages 5.5% per year over a decade, which can result in substantial losses. For instance, with the average annual pension contribution in the UK around £2,100, choosing a higher-performing fund could yield an additional £115.50 annually, amounting to £1,155 over ten years.
Another critical mistake is withdrawing pension savings before reaching the normal retirement age. The UK’s HM Revenue and Customs (HMRC) imposes a staggering 55% tax on early withdrawals, deeming them “unauthorized payments.” In contrast, retirees can access 25% of their pension pot tax-free. For example, withdrawing £30,000 early incurs a tax of £16,500, whereas waiting until the age of 55 reduces the tax to only £4,500.
Planning for Inheritance Tax
With the impending changes to pension taxation, experts are advising individuals to prepare for the new IHT implications. Starting in April 2027, pensions will be included as part of an individual’s estate and subject to IHT. The average pension pot left behind when an individual passes away is estimated to range from £50,000 to £150,000. If a person dies with £100,000 in their pension pot, their estate could face a tax liability of £30,000.
To mitigate this financial impact, experts recommend utilizing IHT gift rules, which can help reduce the taxable amount. This includes taking advantage of the £3,000 annual exemption, making smaller gifts of £250, and providing unlimited gifts to spouses or charities.
By remaining proactive in pension planning and avoiding common pitfalls, individuals can better secure their financial future and potentially save thousands in taxes.
