Britons have been urged to read up on the tax allowance rules for their pension contributions to make sure they are getting the best return on their retirement savings.
Experts at True Potential shared a list of the top mistakes people can make when arranging pensions.
They warned a person could end up with a lower standard of living if they are not careful about how they plan their pensions and retirement income.
The group said many people do not realise they don’t have to take their 25 percent tax free lump sum from their pension as soon as they reach 55, the age when a person can start to draw down from their pension.
The experts said: “You can instead take it in smaller increments at any stage of your retirement.
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“Some people fall foul of this misconception, withdrawing and spending their entire lump sum before realising that their remaining pot isn’t enough to make it through retirement, forcing them to seek an extra income stream such as a part-time job.”
The group also warned people can make the mistake of withdrawing the lump sum and putting it in a high street bank account, which often has a rate lower than that of a pension pot.
They gave the example of a person who took 25 percent of a £500,000 pot at the age of 55 but did not retire until 65.
The remaining £375,000 in the pension pot could be worth £682,273 if it grew at the industry average of six percent.
But if this person left the full amount in their pension pot, the fund would grow to £909,698, providing more than £227,000 for the person to use during their retirement.
Most financial advisers recommend a person needs to build a pot to last them at least 25 years so the extra funds would provide £9,000 a year more.
The wealth experts also urged pension savers to check if they have any lost pension pots. The group said: “People who have saved all their lives for retirement could have to settle for a lower standard of living than they are entitled to.
“To avoid this, it’s a good idea to take some time to work out exactly what you’ve got tucked away when you’re approaching retirement and double check if there’s anything from one of your first few jobs that you’ve forgotten about.
“Over many years these small pots may have grown to sizable sums, so it’s always best to check and make sure.”
According to calculations from True Potential, a pot worth £4,000 in 1990 would be worth £28,828 today if it grew at the industry average of six percent.
Once a person has found how many pots they have, they may want to consolidate them into one pension pot to make it easier to manage their investments.
Another tip from the group is to make sure a person’s Expression of Wish is up to date. This document indicates how a person would like their pension pot to be divided when they die.
People often arrange this in a 98 percent, one percent one percent format, with a person’s spouse or significant other getting the 98 percent, while their children get one percent each.
This means that when the other spouse dies, the pot is divided equally between the two children.
The wealth firm also urged Britons to get a ‘financial MOT’ to get an overview of their pensions and retirement finances.
True Potential CEO, Daniel Harrison, explained :“There’s a lot to sort when you’re planning your retirement and it can be a bit overwhelming, so there’s always a chance that you’ll miss something.
“To avoid the stress I always recommend that people speak to a financial adviser who can guide you through the process of mapping out how much you’ve got, how much you need, and how best to make it last. That way you can avoid costly mistakes.”
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