Britons are being cautioned about three prevalent pension mistakes that could potentially cost them upwards of £40,000. This warning comes as research indicates that more than 10 million adults in the UK are “too busy” to engage with their pension plans. Financial experts are urging individuals to take proactive steps in light of upcoming taxation changes set to take effect on April 6, 2027.
The impending changes will classify most unused pension funds as part of an individual’s estate for Inheritance Tax (IHT) purposes, affecting many pension pots that were previously exempt. As a result, these funds could be subjected to a tax rate of 40% upon the account holder’s death. Experts warn that failing to address these issues could lead to significant financial losses for many Britons.
Common Pension Mistakes to Avoid
Antonia Medlicott, Managing Director of financial education specialists Investing Insiders, highlights the importance of understanding common pension pitfalls that could lead to financial loss. “Pensions are an important part of all of our futures,” she noted, “so it’s essential that we are aware of the common mistakes that could lose us money.”
One of the primary mistakes is neglecting to research the best-performing pension funds. Many providers offer multiple options for investment, and comparing pension accounts against alternative funds is crucial. Experts estimate that the performance disparity between the best and worst performing funds can average around 5.5% per year over a decade. For instance, with the average annual pension contribution in the UK being approximately £2,100, investing in a higher-performing fund could yield an additional £115.50 annually, leading to a total of £1,155 over ten years.
Another significant error involves withdrawing pension savings before reaching the standard retirement age. Doing so can trigger severe tax penalties, with HM Revenue and Customs (HMRC) imposing a hefty 55% tax on withdrawals considered “unauthorised payments.” In contrast, retiring at the appropriate age allows individuals to benefit from tax incentives, including a 25% tax-free withdrawal from their pension pots. For example, withdrawing £30,000 early might result in a tax bill of £16,500, while waiting until age 55 would reduce the tax owed to just £4,500.
Preparing for Inheritance Tax Changes
With pensions set to be included in an individual’s estate for IHT purposes from April 2027, experts are advising individuals on how to mitigate this potential financial burden. To minimize their inheritance tax liability, individuals can utilize IHT gift rules. This includes an annual exemption of £3,000, smaller gifts of £250, and unlimited gifts to spouses or charities.
The average pension pot remaining at the time of an individual’s death ranges between £50,000 and £150,000. If an individual passes away with £100,000 still in their pension fund, it could result in a tax liability of up to £30,000.
In light of these potential pitfalls, financial experts are emphasizing the importance of staying informed and proactive about pension management. By addressing these common mistakes, individuals can protect their financial futures and ensure that their pension savings serve them well in retirement.
