Financial Expert Warns Pension Savers Over Three Costly Mistakes
Antonia Medlicott, Managing Director of financial education firm Investing Insiders, has issued a stark warning to pension savers across the UK about three common errors that could significantly diminish retirement funds. According to her analysis, these mistakes have the potential to reduce pension pots by as much as £40,000, highlighting the critical importance of informed financial planning for future security.
The Three Major Pension Pitfalls
Ms Medlicott identifies three primary areas where savers frequently go wrong, each carrying substantial financial consequences:
- Leaving money in poorly performing funds
- Accessing pension funds too early or paying excessive fees
- Ignoring inheritance tax changes affecting pension assets
"Pensions are an important part of all of our futures, so it's crucial that we remain aware of the common mistakes that could potentially lose us significant amounts of money," Ms Medlicott emphasised. "Some of these errors can be as straightforward as withdrawing your pension before reaching a certain age, making it essential to stay informed about upcoming pension changes, particularly given recent legislative trends."
Performance Gap Between Pension Funds
Over a ten-year period, research indicates that the performance gap between the best and worst performing pension funds can reach as much as 5.5% annually. With the average annual pension contribution currently standing at approximately £2,100, this performance differential translates to £115.50 per year – or £1,155 over a full decade – simply by being invested in a higher-performing fund rather than an underperforming one.
The High Cost of Early Withdrawal
Early access to pension funds carries particularly severe tax implications. For instance, withdrawing £30,000 prematurely could result in a substantial tax bill of £16,500. By contrast, waiting until at least age 55 would see this tax liability reduced to just £4,500 – representing a significant saving of £12,000 for disciplined savers.
Inheritance Tax Changes Looming
From April 2027, pensions are scheduled to be included as part of an individual's estate for inheritance tax purposes – a significant policy shift that will bring far more families into the inheritance tax net. Inheritance tax is currently charged at 40% on estates valued above £325,000, although transfers to spouses or civil partners remain exempt from this taxation.
One effective strategy to reduce inheritance tax exposure involves utilising IHT gift allowances, including annual gifts of up to £3,000, which fall outside the taxable estate. Larger gifts may also be made but could become subject to taxation if the donor passes away within seven years of making the gift.
In the United Kingdom, the average pension pot remaining at death is estimated to range between £50,000 and £150,000. If an individual were to die with £100,000 remaining in their pension alongside an average estate value of £335,000, approximately £30,000 of that pension could potentially be lost to inheritance tax under the new regulations.
These warnings come at a critical time for pension savers, with financial experts urging increased vigilance and proactive planning to protect retirement assets from unnecessary erosion through avoidable mistakes and changing tax legislation.
