SEVERAL easy pension mistakes could cost you thousands as six changes shake up your finances.
Between pay boosts and a new “pot for life” system, as well as auto-enrolment changes, it’s a busy year for pensions.
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With all these important changes on the way, it’s good to be aware of the easy-to-do mistakes that could affect your retirement pot.
Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said: “Avoiding pension pitfalls is key to making the most of your retirement planning.
“Claiming the tax relief you are entitled to sounds like it should be a given, yet £245million a year remains in the government’s coffers on average.
“Similarly, losing track of an old pension can leave you far worse off in retirement.
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“Even the smallest pensions can grow and over time you could be missing out on a significant chunk of savings.”
Helen has rounded up five of the biggest pension mistakes you don’t want to be making, and the expert has also revealed what to do instead.
Plus, we reveal the full list of changes to pensions happening this year.
Five key pension pitfalls to avoid
Forgetting to claim your tax relief
Pension savers missed out on £1.3billion of tax relief in the five years to 2020/21, according to Hargreaves Lansdown.
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Helen said: “You can claim tax relief on your pension at your marginal rate and over time this can make a significant difference to how much goes into your pension but in some cases, you will need to claim on your tax return to get the full amount you are entitled to.”
Basic rate tax relief is usually added to your contribution but if you are a higher or additional rate taxpayer you may need to claim the extra 20% or 25% tax relief through self-assessment.
You won’t need to put in a claim if your pension is set up as a salary sacrifice arrangement.
If your pension is set up under a net pay arrangement, then the correct tax relief will also be taken.
“However, if your pension is set up under what is known as relief at source then you will need to claim the extra tax relief via self-assessment,” Helen added.
Not making best use of higher annual allowance and carrying forward
Helen says another easy mistake you can make is not making the best use of the higher annual allowance and carrying forward.
She explained: “You can save up to your annual earnings or £60,000 (whichever is the lowest) into your pension every tax year.
“However, if you have any unused relief from previous tax years then you can also make use of this (as long as you aren’t contributing more than your annual earnings), using a process known as carry forward where you can use allowances from the previous three tax years.”
This essentially means in this tax year you could pay up to £180,000 into your pension and benefit from tax relief – because you would be making use of this year’s annual allowance of £60,000 and the previous three years where it was set at £40,000.
However, there are caveats, though.
She said: “If you’re a high earner with an adjusted income of more than £260,000 per year and a threshold income of more than £200,000 per year, then your annual allowance will be lower.
“Under what is known as the tapered annual allowance, for every £2 your adjusted income goes over £260,000, and your annual allowance for the current tax year reduces by £1.
The minimum reduced annual allowance you can have in the current tax year is £10,000, but these limits have changed in recent years so check how this affects how much you can put in.
Helen warned: “If you have already flexibly accessed your pension and are looking to rebuild it by making contributions, you will be limited under the money purchase annual allowance (MPAA) to £10,000 per year.
“You cannot use carry forward on unused MPAA in previous years.”
Setting and forgetting your contributions
Most Brits have a workplace pension scheme which helps employees save for their retirement outside of the state pension.
Since October 2012, employers have had to automatically enrol workers into one of the schemes.
There are minimum contributions that you and your employer must pay.
A minimum of 8% must be paid into the pension, with you contributing 5% and your employer paying at least 3%.
But workers can look to boost the amount they save into their pot and increase their nest egg substantially upon retirement.
Helen said: “It’s tempting just to set your pension contributions when you join the scheme and then never look at them again.
“However, revisiting them at key periods can boost your retirement resilience. Increasing contributions every time you get a pay increase or a new job can be a relatively painless way of getting more into your pension.”
She says it will also help future-proof your pension against the effects of inflation which can erode spending power over time.
Not making the most of your employer contribution
Speaking of workplace pensions, it could also be a mistake to not make the most of your employer’s contribution too.
Helen explained: “Many employers stick to auto-enrolment minimums when it comes to their contributions but there are others who are willing to pay in more.
“Some will potentially hike them even further if you increase your contribution – a process known as employer matching.”
Over time this can make a “huge” difference to how much goes into your pot, Helen added.
So if your employer offers it and you can take advantage you could really boost your pension prospects.
In these cases, if an increase of £1,000 were matched, £2,000 would go into your pension at a cost of as little as £550
Losing track of old pensions
If you’ve had a few different jobs in your career, you will have likely had several pensions set up.
It’s easy to lose track of old pot and this could leave you thousands of pounds worse off in retirement.
Research from the Pensions Policy Institute estimates there is £26bn of lost pension money washing around the system so it’s a major issue that could be undermining your retirement.
Helen urged: “Make a list of your old employers and make sure you have pension paperwork for each one.
“If you find one is missing, then call the government’s Pension Tracing Service and they will help you track down contact details.”
Once you’ve found your lost pension then it can make sense to consolidate it into one place, like a SIPP (self-invested personal pension) for example.
Having an overarching view of what you have can help you make better decisions as well as cut down on administration.
Typically, you’ll improve your investment choice as well as make it easier to plan your pension savings.
It’s important to check that you aren’t incurring any expensive extra fees or losing valuable benefits such as guaranteed annuities by consolidating though.
It is also rarely a good idea to transfer a final salary pension scheme.
Six key changes to pensions in 2024
It’s set to be a bumper year for both pensioners and workers alike.
Helen said: “We’ve seen some big changes to pensions over the years but 2024 could see the foundations laid for some truly huge developments.
“However, pensions are also known for their drama, and we can expect a bit of that in 2024 as well.”
Here are all the pension changes coming your way this year.
The state pension will increase
Pensioners will get an 8.5% boost to their state pension from April.
This means a bumper rise of up to £901 a year.
Helen said: “After a tough year of high prices and squeezed budgets, this inflation-busting increase will be welcomed by many.
“However, with this being the second large increase in a row debate over how to contain the burgeoning cost of state pension will continue with calls to reform the triple lock.
“As we head towards a general election it will be interesting to see whether maintaining the triple lock forms part of any of the key party manifestos.”
Goodbye Lifetime Allowance
The Lifetime Allowance is due to be abolished from April 2024.
Helen explained: “This is great news for those with large pension pots who faced tax charges if they breached the £1,073,100 limit.
“Its removal sounds easy in practice, but the reality is that the industry has to get to grips with a complex set of rules before this can happen.”
The move is specifically targeted at doctors who leave the NHS early to avoid being trapped by taxes on their savings.
It was first announced in March as part of the Spring Budget but now the date it will be abolished has been confirmed as April 6, 2024.
This will allow workers to put more money into their pension pot before being taxed.
The lifetime allowance is the total amount you can save tax into a pension scheme.
In other words, it’s the maximum amount you can save into all of your pensions combined without incurring a potentially hefty tax charge.
The Lifetime Pension will take shape
Helen said: “The Lifetime Pension took centre stage in the Autumn Statement.
“These reforms would allow people the right to ask their employer to pay pension contributions into the pension of their choice.”
She explained that this could go a long way towards solving the issue of lost pensions and put the member firmly in control of their own pension planning.
“It will, however, take some time to work through so we will not see them introduced any time soon,” Helen added.
The good news is that you can take steps today to take control of your pensions by tracking down your lost pensions.
Will the extension of auto-enrolment finally happen?
Millions could be better off in retirement after a big shakeup of auto-enrolment rules.
In September the government was granted the power to lower the age limit to be automatically enrolled into workplace pensions from 22 to 18.
It will also axe the lower earner’s limit (LEL) and see a worker on any amount of income be able to save.
Helen said: “We had hoped to see a timetable for the extension of auto-enrolment in the Autumn Statement, but it was absent.
“Lowering the minimum age from 22 to 18, and allowing contributions from the first pound, will help more people build bigger pensions, particularly women and people in part-time work.”
The Bill received Royal Assent in the Autumn, but so far no plans for the consultation or implementation have been announced.
“It’s to be hoped it is hovering near the top of the new pension minister’s in-tray for action in the New Year,” Helen said.
It will get easier to buy voluntary NI contributions
An online system for people to buy voluntary National Insurance contributions (NICs) is said to be on the way.
The move should also make it much easier for people frustrated with long call wait times to buy the National Insurance credits needed to plug gaps in their records.
Helen said: “Recent data showed a massive 85% surge in the amount paid for these contributions and we can expect to see this interest to continue throughout the next year.
“DWP phone lines rang red hot all year as people raced to meet the deadline to buy voluntary NI contributions for gaps going back to 2006.
“The resulting chaos prompted DWP to extend the deadline to April 2025 and to pledge to introduce an online system to reduce call wait times.”
No date has been set for the online system’s introduction, but it is expected in Spring.
Pension Credit rise
Pension credit is a tax-free benefit designed to help with living costs if you are over the state pension age (currently 66) and on a low income.
Around 1.4million pensioners receive pension credit, but 880,000 who could be eligible are not claiming this extra financial help.
It is often described as a “gateway benefit” because even a small award can provide access to a wide range of other benefits.
This can include help with housing costs, council tax or heating bills and is in addition to the extra cost of living payments.
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Pension credit standard minimum will also rise by 8.5%, like the state pension.
This means payments will increase from £201.05 to £218.15 for single households.
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