Six pension mistakes could cost you £10,000s, experts warn

Retirement planning and making the most of pension pots is firmly under the spotlight with more people facing a shortfall when trying to achieve a comfortable retirement.

The government’s Pension Commission warned in a recent report around 15 million people aren’t putting enough away for later life, particularly low and middle-earners, the self‑employed and women.

Meanwhile 45% of working-age adults, around 18 million people, are not saving into a pension at all despite nearly half of them being in work, the report found.

Greater numbers of people are forecast to be renting into retirement as well, according to recent research by retirement firm Standard Life, increasing the financial burden on pensioners.

All the while, the cost of the triple lock is coming under strain and the state pension may not be as generous in the future.

Given the context, your pension savings should be working as hard as possible. Experts say, though, for a lot of people, they’re not and basic errors are costing savers potentially tens of thousands of pounds.

Steve Webb, partner at pension consultants LCP, Helen Morrissey, head of retirement analysis at investment platform Hargreaves Lansdown, and Daniela Silcock, director of Daniela Silcock Pensions Research, shared six pension mistakes you should be avoiding.

Not keeping paperwork

An estimated £31 billion is sitting in lost pension pots, according to the Pension Tracing Service. If you have a pension you have forgotten about, then some of this money could be yours.

Losing tracking of a pension pot can be easily done if you’ve misplaced paperwork containing contact details for pension providers and policy numbers.

These types of details will usually be on annual account statements or sometimes welcome packs or joiner letters from your pension provider.

Webb said: “I have lost count of the number of people who have contacted me asking for help tracking down a lost pension from a previous job.

“Those who have kept paperwork have a far better chance of success, enabling us to work out where the pension money is now held.”

If you’ve looked thoroughly and can’t find key pension paperwork anywhere, there are other ways to track down policy numbers and contact details for providers.

If you’re looking for an old workplace pension pot, you can try getting in touch with a previous employer through Companies House. Failing this, you could contact the free-to-use Pension Tracing Service.

Not making the most of employer matching

Under auto-enrolment rules, workers earning more than £10,000 a year are automatically put into an occupational pension scheme by their employer.

Under the rules, you contribute a minimum of 5% of your monthly salary to the pension and your employer adds 3% on top.

However, you can contribute more to a workplace pension if you want and some employers will ‘match’ this amount.

For example, you could pay 8% a month and your bosses would add 8%. If you have the budget, then matching is worth considering as it could give you a significant boost to your pension savings with extra free cash from your employer.

Research by Standard Life found someone starting working at 22 on a salary of £25,000 increasing monthly contributions into a workplace pension by just 1% could add £26,000 to their pension pot.

Webb said: “[It] is an incredibly efficient way of rapidly building up a pension pot, as every extra contribution is effectively doubled overnight.”

Not claiming tax relief on pensions

Pension tax relief is a tax break offered by the government to encourage people to save for retirement.

It is applied at your marginal tax rate, for example a basic-rate taxpayer would receive 20% tax relief and a higher-rate taxpayer 40%.

All basic-rate taxpayers receive pension tax relief automatically, however, if you are in a ‘relief at source’ pension scheme, you will need to proactively claim tax relief if you are a higher or additional-rate taxpayer.

Roughly 800,000 people failed to claim higher rate pension tax relief worth over £1 billion in 2023/24, according to a Freedom of Information request submitted by Webb.

He said so many people were missing out simply because they “will not realise that there are two different ways in which pension tax relief can be delivered”.

“This may be news to many people…but it matters hugely – if you pay £80 into a pension you get £20 basic rate relief making a gross contribution of £100 into your pension. But having made a gross contribution of £100 you are entitled to £40 relief if you are a higher rate taxpayer, not £20, and £45 if you are an additional rate taxpayer.

“You only get this if you claim it. The missing amount is £20 per £80 that you have paid in, which could amount to thousands of pounds for some people.”

You can claim tax relief either through your tax self-assessment tax return or via gov.uk.

Transferring a defined benefit pension into a defined contribution pension

A defined benefit (DB) pension, sometimes called a final salary pension, typically pays out a certain amount based on your salary and how long you’ve been part of a pension scheme.

Defined contribution (DC) pensions pay out a certain amount depending on how much you and potentially an employer have put into them, as well as how your investments have done.

You can transfer a DB pension into a DC pension, however Silcock explained once you’ve done this, the guaranteed benefits that come with it are permanently given up.

“A DB pension provides an income for life with protection against inflation. It may also provide an income for a partner or other dependent after the member dies.

“After a transfer [to a DC pension]…poor returns or high withdrawals could mean that the money runs out.”

That said, there can be advantages to transferring to a DC pension, including that you get more flexibility in choosing how your pot is invested.

You can also withdraw all the money from a DC pension in one go, which could work out more cost-effective than a DB pension if you don’t have long to live or you need the money to cover medical expenses if you have a terminal illness.

In addition, while most DB pensions will continue to pay a portion of your pension income to any of your dependents after you die, DC pensions can typically be left to a wider set of people, giving you more choice in who inherits your pension funds.

Adding too little into your pot and for not long enough

Not putting enough into a pension throughout your life, and starting too late, will reduce the size of your retirement pot.

Silcock pointed out that some people don’t contribute to pensions because they’re taking on caring responsibilities or simply because they can’t afford it, however others delay saving simply because “retirement feels a long way off”.

“People are likely to get more from their pension if they start contributing when they are young and continue throughout their working life,” Silcock said.

She gave the example of someone’s pension growing at 5% a year, with £1,000 contributed at age 20. This would be worth around £7,040 by the time the person turned 60.

This same amount added to a pension at age 50 would be worth just £1,630 – £5,410 less.

Silcock said for someone who doesn’t have the budget to start saving into a pension, it’s worth exploring if a partner can make contributions on their behalf.

Assuming you will get a full state pension

The full new state pension is worth £241.30 a week and can form the bedrock of your retirement pot, but not everyone will get that amount. Anyone planning for retirement should take time to look at how much state pension they will get.

To receive the full amount, you need 35 years’ National Insurance (NI) contributions, however you may be missing years, for example if you’ve had to leave a job to care for a child or relative.

Morrissey warned: “Don’t assume that you will receive a full state pension. If you’ve spent any time out of the workforce, you could have gaps in your National Insurance record that mean you get less.”

If you are missing years, you can top up your state pension with voluntary contributions – but before you do, consider whether it is worth topping up National Insurance contributions.

If you’re young and still working, you have plenty of time to make up for the gap.