Pension Mistakes That Can Cost You Money

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Retirement saving experts found that too many pension savers who do not consult a financial adviser have their money in cash.

Around a third make this mistake, says the Financial Conduct Authority, which could cost them a third of the income they could make over 20 years of saving.

Leading pension platform AJ Bell explains this is not the only savings error that can cost someone money in retirement.

Paying too much in charges

Tom Selby, a senior analyst at the firm advises checking costs and charges paid to pension platforms and fund managers as small discrepancies can amount to big differences over the years’

Charges fall between 0.4% and 1.6%, says the FCA.

“Switching from a higher cost provider to a lower cost provider, the regulator says you could increase your annual income by 13%,” said Selby.

“This is one of the reasons why it’s critical you shop around before choosing both a provider and your retirement income option.”

Balancing risk and withdrawals

Failing to balance risk and react to market switches can cost a retirement saver dear.

“Take someone who invests a £100,000 fund in the FTSE All Share, paying 1% in pension and administration charges. They withdraw £10,000 a year in income from their pot,” said Selby.

“If they had started taking an income in 2007 – just before the financial crisis hit – they would have withdrawn £100,000 by December 2017 but be left with just £16,400 left in their fund.

“If the same person started taking an income at the end of 2008 – at the beginning for the bull-run – they would have taken £90,000 of income and still have a fund worth over £113,000.”

Monitor fund performance

“Savvy investors will not only know where their money is invested, but also regularly review those investments and how much they are taking out to make sure both remain appropriate,” said Selby.

“However, many investors simply don’t engage with their retirement pot. For example, the FCA found one in three people who had gone into drawdown recently had no idea where their money was invested – possibly because they were simply after their 25% tax-free cash.

Dealing with unspent funds

“Savers in drawdown can now pass on any untouched funds tax-free if they die before age 75, or at their recipient’s marginal rate of income tax if they die after.  No inheritance tax is normally due. This is now one of the major attractions of drawdown for many people,” said Selby.

“However, savers often fail to nominate who they want to receive their pension or review their choices in the event circumstances change.”

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