The tax planning you can do with pensions is great and they are still the cornerstone of most people’s retirement strategies.

However, a pension is a product that comes with some of the most complex rules in finance. Get it wrong and you could be in line for some serious tax penalties.

Here are 5 of the most common pension mistakes we and others in our profession see.

#1 – Tapered Annual Allowance

  • The standard annual allowance is £40,000.
  • But if you earn over £110,000 you may fall into the tapered annual allowance.
  • Meaning your allowance could reduce down to as low as £10,000.

#2 – Tapered Carry Forward

  • If your pension contributions breach the annual allowance you may be able to use the unused allowances of the 3 previous years (known as carry forward).
  • BUT if you are impacted by the tapered annual allowance it is only your reduced allowance that can be carried forward.

#3 – Not building up carry forward

  • In order to claim carry forward, you need to have been a member of a pension for each year you want to carry forward (e.g. 3 years if you are carrying forward the maximum).
  • If your earnings are likely to increase significantly over the next few years get a pension now even if you only pay in £5 just so you start to build up unused annual allowance.

#4 – Big pension contribution just before retirement at the start of a tax year

  • If you plan to retire at the beginning of a tax year, perhaps your 65th birthday is in May? Then avoid paying a large contribution into your pension at this point.
  • You need earnings to match the level of pension contribution you wish to make.
  • So if you’re retiring at the start of the tax year you will probably have little earnings to cover the contribution.
  • Better to make the contribution at the end of the previous tax year.

#5 – Taking flexible pension income and still making pension contributions

  • Once you take flexible withdrawals from a pension you are limited to only being able to contribute up to £4,000 back into a pension.
  • This is known as the Money Purchase Annual Allowance.
  • You can avoid this by taking your pension withdrawals from your pension commencement lump sum.

Your financial situation may seem relatively simple but sometimes you don’t know what you don’t know.

The value of a good Financial Adviser is our insight and deciphering of the information.

We even have a range of fixed-fee pricing that is tailored to the level of complexity you require. 

If you would like to check your pension planning to ensure you are not making a BIG mistake then take advantage of our free 15-minute call. You can speak to a Chartered Financial Planner who will listen to your situation, give you an outline of what you need to consider and guide you in the right direction.

Risk warning:

Stock market linked investments and any income from them, can fall as well as rise and is not guaranteed. Any figures quoted are for illustrative purposes and should not be taken as a forecast or guarantee. Past performance should not be seen as an indication of future returns and clients may get back less than they have invested.