If you’ve recently retired or are approaching retirement, it’s vital to ensure your money is working as hard as it possibly can for you so that it won’t run out too soon.
For most of us, reaching retirement marks more than one milestone. Not only do you no longer have to work to earn an income, but you may have some money to invest (or spend) as well.
However, it’s crucial that your retirement savings last, so we’ve put together a list of the seven deadly sins of retirement to avoid so that you don’t end up financially insecure later in life.
If you’re considering getting professional financial advice, Unbiased is offering Rest Less members a free pension review. It’s a chance to have a qualified independent financial advisor (IFA) take a look at your pension arrangements and give an unbiased assessment of your retirement savings.
The review is free and without obligation, but if the IFA feels you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.
1. Not checking where your pension savings are invested
If you’ve signed up to a pension scheme through your workplace that’s linked to the stock market, usually your money will be invested in a default fund unless you actively choose to invest it elsewhere. The key thing to remember is that the default fund isn’t chosen by you.
Default funds can invest in a wide range of investments including shares (usually referred to as ‘equities’), bonds (which are IOUs for loans, either to companies or to the government), commercial property and cash.
Check how much of the fund is invested in shares. The higher the percentage in shares, the higher the risk. You also have the potential for higher reward but it’s not guaranteed. In general terms, you should take less risk as you get older and certainly as you approach retirement. On the other hand, if the fund only has a small percentage invested in shares and you’re not planning to retire for several years, you could miss out on returns.
If you don’t know what your pension scheme default fund is invested in, the first thing to do is to get hold of your pension scheme handbook or look online. If it’s not where you’d like your pension to be invested, do something about it. Find out more in our article Where is my pension invested?
2. Not knowing how much you’re paying in charges
Annual management charges for pension schemes have reduced in recent years, since the introduction of a cap on charges back in 2015. These days, annual charges of 1-2% are considered expensive, so if you’re paying this amount, it may be worth considering moving your pension to a cheaper plan.
Bear in mind, however, that charges aren’t the only consideration to weigh up when reviewing your pension, and lower charges don’t necessarily always mean a better deal. For example, if you belong to a workplace pension scheme charging between 0.6% and 0.8% that communicates well with you, tells you how you can pay more and what you can do when you retire, you may consider this better than having a scheme with lower charges that communicates badly and only offers a limited range of investment options. Find out more about the impact of pension charges in our guide What pension charges am I paying?
3. Not splitting your savings to keep them safe
If you have a lot of money held in savings accounts, check that you’d be covered by the Financial Services Compensation Scheme (FSCS) if the worst were to happen.
You’re normally covered for the first £85,000 of savings held with any one bank as long as it doesn’t share a banking licence with another bank or brand in the same group. For example,First Direct is part of HSBC, so if you had £60,000 with HSBC and £30,000 with First Direct, you would have a total of £90,000 with HSBC plc. That means £5,000 would not be covered by the FSCS.
Which? has a useful tool that can help you understand which financial firms are part of the same group. You can find out more about the best ways to protect your savings in our guide Are my savings safe?
4. Not being on your guard against pension scams
This shouldn’t really fall under the ‘sin’ heading, as scams can be incredibly realistic and easy to fall for, so it’s not your fault if you are a victim of one. Unfortunately, so-called ‘boiler room’ scams in particular are big business. There were a total of 1,595 reported pension scams in England and Wales between 2020 and 2022, with the highest financial loss recorded in 2021 at just over £10m. The average cost of these scams is £16,500 per victim.
Many pension scams are ‘boiler room’ scams run by firms that are often based in Spain or the United States and use all kinds of high pressure sales techniques to get investors to part with large amounts of cash. The shares they buy are either non-existent or worth very little. If you’re dealing with an overseas company, you can check the list of warnings from overseas investors at Investor Alerts Portal (iosco.org). You can learn more about pension scams and some of the warning signs to watch out for in our guide Don’t let scammers steal your retirement.
5. Following fads
An investment performs outstandingly well, it’s written about in newspapers and online. Money subsequently piles in (fuelling the performance further) and a few months later, as it did with technology stocks in the late 1990s, the bubble is likely to burst.
New products come on the market all the time and some of them may be right for you, but you shouldn’t pile in just because everyone else is doing so. A golden rule of investing, especially for retirement, is that you should never put your money into anything you don’t fully understand. Find out more in our article Investing – the basics.
6. Using up too much of your pension too soon
If you’ve decided to leave your defined contribution pension savings invested to grow over time while taking an income as and when needed, you’ll be using flexible drawdown, or flexi-access drawdown. Find out more in our article What is pension drawdown and how does it work?
However, if you use drawdown to take an income from your pension there’s the risk that you could run out of money if you take too much out too soon. How long your pension lasts will depend on a variety of factors, including your life expectancy, inflation, the performance of your pension investments and how much income you’re likely to need.
You can use the Rest Less pension calculator to see a forecast of the pension income you’re likely to get when you retire, based on the current value of your retirement savings. This can include your State Pension entitlement if you want it to, and you can also see the impact of taking 25% of your pension as tax-free cash. You can amend your retirement age and the level of income you want, to see how these factors affect the length of time your pension will last.
Find out how to use our calculator and what it will show you in our article How to use the Rest Less pension calculator.
7. Getting hit by an unnecessary tax bill
If you’re aged 55 or over, you can usually withdraw 25% of your pension pot free of tax – but for any withdrawals over this amount, pension withdrawals are considered part of your income and you’ll be taxed at your marginal rate.
If you take a big chunk out of your pension one year, this could even push you into a higher tax bracket and subject you to a higher rate of income tax altogether. In simple terms, the less income you take from your pension, the lower your tax bills will be, so if you can, ideally you should only take the amount you need from your pension each year.
Many people choose to take an income from their retirement savings using a flexible drawdown plan. This type of plan enables you to leave your pension invested and vary the amount you take out, so it may help you keep your tax bills down if you manage withdrawals carefully. Read more about drawdown in our article What is pension drawdown and how does it work and about tax on pension withdrawals in our guide How much tax will I pay when I withdraw my pension?
If you’re considering getting professional financial advice, Unbiased is offering Rest Less members a free pension review. It’s a chance to have a qualified independent financial advisor (IFA) take a look at your pension arrangements and give an unbiased assessment of your retirement savings.
The review is free and without obligation, but if the IFA feels you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.
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