Everyone makes mistakes, and in retirement planning what matters most is catching and correcting them. At Reeves, we work with people from all walks of life, and some come to us after slipping into avoidable errors with their pensions and retirement income. The good news is that most can be put right. Below are five of the most common mistakes made in retirement, and how to avoid them, starting with the biggest one of all: misjudging how much you need to retire.
1. Retiring with an unrealistic plan
The single most common mistake is not really knowing how much you need to retire. Research by Legal & General found that a large share of retirees needed more money than they had expected, with a significant minority needing considerably more. Many people underestimate the cost of their retirement plans, whether that is a world cruise or a classic motorbike, and overestimate how far their savings will stretch.
Working out how much you need to retire, and how to turn your assets into that income, is exactly what a financial adviser helps with. At Reeves, we start by understanding your circumstances and goals, review your pensions and other assets, and show you your options. Often it is a pleasant surprise, and that bucket list is closer than people think. For clients already in drawdown, we review the plan regularly to keep income suitable and sustainable, typically higher in the early years, then adjusting once the State Pension begins.
2. Taking tax-free cash too early
Many people reach 55 (57 from 2028) and take their full 25% tax-free lump sum straight away, often to help family, even when they do not need it. This is frequently a costly mistake. Once the tax-free cash is out of your pension, the only further money you can usually take without paying tax is covered by your personal allowance, currently around £12,570 a year if you have no other income.
Leaving the tax-free cash invested in your pension for longer can mean reaching your target income while paying less tax for longer. Money sitting in your bank account earns returns that are taxable, whereas inside the pension it can keep growing tax-efficiently, and a larger cash balance could even affect your eligibility for some benefits. As a rule of thumb, keep your tax-free cash in your pension unless you have a genuine need for it. (Figures here are illustrative and rates change, so check the current position.)
3. Not reviewing where your pension is invested
Too often people pay into a pension and then leave it untouched, assuming it is being looked after. But markets move and the value of different assets shifts over time. Actively managing your investments, taking opportunities and protecting against risks, can make a real difference to the size of your pot at and during retirement.
For most people, the most effective approach is to have a professional manage the investments, monitoring markets and adjusting as conditions change. Reeves has a specialist in-house investment team who do exactly this. Investment values can still fall as well as rise, and past performance is not a guide to the future, but active, professional oversight helps keep your strategy on track.
4. Not making the most of tax reliefs
Pension contributions attract valuable tax relief. As an example, a non-taxpayer contributing £2,880 has it topped up to £3,600 by basic-rate relief, an immediate uplift you would struggle to find anywhere else, and higher earners can claim more. Alongside pension relief, using your personal allowance and your annual ISA allowance each year helps your money work harder.
The key is to review this every year, because allowances reset annually and circumstances change. At Reeves, we run tax planning with clients at the end and start of each tax year to make sure nothing is left on the table.
5. Not considering all your options, or getting a second opinion
At retirement you have several ways to turn your pension into income: an annuity, pension drawdown, or the benefits of an occupational scheme, or a combination. Without seeing the full picture, it is easy to pick the wrong one. For example, someone with a large pot might swap it for a fixed annuity income, only to end up paying more tax than necessary, when a more flexible, tax-efficient approach might have suited them better.
The right choice depends entirely on your circumstances, which is why a second opinion from a professional is so valuable before you commit to something hard to reverse.