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How to Avoid the Pension Planning Pitfalls

Gresham Wealth

Pension planning is a complex business and with so many rules, options, and nuances, it’s no wonder that people often fall foul of some of the potential hazards when saving for retirement.
Here we look at some of the most common pitfalls and how to avoid them.

Underestimating the amount needed in retirement

Employees paying into a workplace pension may think they are doing enough – but this may not necessarily be the case.

The latest research on retirement living standards by the Pension and Lifetime Savings Association place the annual amount needed for a moderate standard of living in retirement to be £20,800 for a single person and £30,600 for a couple. According to their research, only around one in six single employees are projected to have an income between moderate and comfortable by the time they reach retirement. Around half are on track to expect a lifestyle between minimum and moderate.

Individuals can save as much as 100% of earnings into their pension each tax year up to a maximum of £40,000 gross.
It is possible to make backdated pension contributions for up to 3 years under the ‘carry forward’ rules – but this of course relies on having the cash available to do so.

This is probably the most common pitfall and it comes hand in hand with the below…

Not regularly reviewing your pension pot

Alongside not saving enough, too many individuals are simply unaware of the status of their pension – including how much it’s worth. As one of the most important and potentially significantly sized amounts of money you will have access to in later life, pensions really need to be taken seriously and reviewed at least once a year. It is only by undertaking this process that you can check if you’re on track for the standard of retirement you are aiming to achieve.

Keeping track of pension membership

In today’s world of auto-enrolment, employees will often acquire a number of pensions throughout their career, depending on the number of companies they work for.

To avoid ‘losing track’ of any pensions, it’s important to keep your address and contact details up to date with your employer and any previous pension providers. It is also prudent to keep details of each pension plan you may hold – such as the pension provider or scheme administrator name, the policy number and any online login details you may have.
If you are concerned you may have lost track of a pension from a previous employer, you can either contact that employer to try and obtain the information or use the government’s pension tracing service which can be accessed here.

Pension death nomination

A common misconception is that your Will would detail how a pension is to be allocated in the event of your death. However, as pensions (usually) fall outside of an individual’s estate on death, this isn’t the case. By completing a nomination form and recording this with each pension provider/administrator, you can ensure that they account for your wishes as to whom benefits are paid to, without unnecessary delay. You are generally allowed to select a wide range of beneficiaries to receive the pension, such as family members, friends, associates, a Trust, or a Charity.

Lifetime Allowance issues

HMRC applies a test if the total value of your pension benefits exceeds the Lifetime Allowance (LTA), and any excess will be subject to a tax charge. For the 2022/23 tax year the standard LTA is £1,073,100, which is frozen until 6 April 2025. With regular contributions, tax relief receipts and potential long-term fund growth, coupled with people working for longer, this level could be exceeded more easily than first thought.

For high earners, even where the value of pensions falls below the LTA, it could still be breach it they are part of a company group death in service policy as many group life assurance plans are written under pension scheme legislation. Therefore, any lump sum death benefits paid out could count towards the LTA if death occurred whilst employed.

Not taking advice!

As the above points demonstrate, there are many areas where people can very easily go wrong when it comes to pension planning. Taking advice sooner rather than later will always allow for a greater number of options and therefore a better chance of ensuring you have made the right choices for your circumstances.

To discuss reviewing your current pension provisions or for a wider discussion around your financial plans, please get in touch.

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