Ahead of the autumn budget and the potential pension tax changes, there are three things you should be considering to ensure you are not missing out on pension savings
Ensuring a healthy pension pot before retirement is crucial, and avoiding these three blunders could help boost your savings by up to £40,000.
With the autumn budget looming and fears that Chancellor Rachel Reeves might alter taxation, being aware of these factors will be essential during the time of your retirement.
Antonia Medlicott, managing director of financial education specialists Investing Insiders, has highlighted three common pension pitfalls to watch out for.
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Small financial missteps can pile up overtime, leading to a significant shortfall. For that reason, taking proactive steps now can make sure you’re not left behind in the future years.
Being in a poorly performing pension fund
You can find out 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’ve located your pension, you can then compare its performance against other accounts.
It’s estimated that over ten years, the performance gap between top and bottom decile 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.
Don’t withdraw pension savings early
Withdrawing pension savings before the normal retirement age, or being 55 (57 from 2028), can result in severe tax penalties. 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 instance, if you chose to take out £30,000 from your pension pot prematurely, you’d be hit with a hefty £16,500 tax bill. However, holding off until you’re at least 55 would mean the taxman only gets £4,500, a whopping saving of £12,000.
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Overlooking changes to inheritance tax on pensions
From April 2027, pensions will be included in an individual’s estate and thus, subject to inheritance tax. One method to lessen this is by utilising IHT gift rules, which permit annual gift allowances, as well as larger sums of money, provided the giver survives for at least seven years afterwards.
This strategy will decrease the amount of tax payable after your death, as you can bestow £3,000 per year tax-free to one person, then up to £250 to several different individuals.
This lowers the total amount of inheritance tax you’ll have to fork out, as ultimately there will be less money in your ‘estate’. The amount you save hinges on how much you gift and how much you already have in your pot.
In the UK, the typical amount left in a pension pot when someone passes away ranges between £50,000 and £150,000, reports Birmingham Live. So, if someone dies with £100,000 untouched, assuming they also had the national average estate at death of £335,000, of that £100,000, £30,000 would then be paid in tax.