UK households warned of 3 pension mistakes that could cost over £40,000

Anyone putting money aside for their retirement has been issued a stark warning about three of the most frequent blunders UK families make when building up their pension funds.

Antonia Medlicott, managing director of Investing Insiders, revealed these errors could cost them upwards of £40,000. She explained: "Pensions are an important part of all of our futures, so it's important that we are aware of the common mistakes that could lose us money.

"With some of these being as simple as not withdrawing your pension before a certain age, make sure to keep yourself informed about any future pension changes, as recent trends seems likely''.

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Poor performance

Birmingham Live reports that Antonia warned: "It might be the easy option to let someone else choose your fund for you, but our research shows it's not always the best performing fund.

"You can discover where your pension is invested by reviewing your annual paperwork from your pension provider, or alternatively, you can log in to your online account and check there.

"Once you have found your pension, you can then compare its performance against other accounts. It's estimated that over ten years, the performance gap between the best and worst performing funds is 5.5 per cent per year.

"With the average pension contribution being around £2,100 a year in the UK, this means you'd be £115.50 better off annually in a higher-performing pension fund. Over 10 years, this would be £1,155."

Withdrawals

Antonia clarified: "It's seen as an 'unauthorised payment' which HMRC charges 55 per cent tax on, although many pension providers won't let you withdraw your pension early except for ill-health or Protected Retirement Age.

"However, when you wait for retirement, you get benefits like 25 per cent of your pension pot being tax-free, with the rest depending on what rate it falls in. For example, if you decided to withdraw £30,000 from your pension pot early, you'd end up paying £16,500 in tax.

"But waiting until at least 55 will result in the taxman only seeing £4,500, a crazy £12,000 saving."

Changes to inheritance tax

Antonia explained: "In the UK, the average amount left in a pension pot when someone dies is between £50,000 and £150,000. So if someone dies with £100,000 unused, assuming that they also had the national average estate at death of £335,000, of that £100,000, £30,000 would then be paid in tax.

"It pays to plan well to mitigate the effects, as pensions being included in IHT rules further complicates what was already a complex area of tax law. One way to minimise this risk is to take advantage of IHT gift rules, which are exempt and allow for annual gifts of up to £3,000.

"It's possible to gift larger amounts too, but these may be subject to IHT if the person making the gift then dies within seven years of making it.

"This reduces the overall amount of inheritance tax you will have to pay, as ultimately there will be less money in your 'estate', and only applies to estates worth more than £325,000, but does not apply if passing this on to a spouse or civil partner."

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