5 costly pension mistakes to avoid
If you make a mistake with your pension, you could end up paying for it later. Discover 5 tips to make the most of your pension and tax relief allowances.
Last Updated: 14 March 2025
Everyone makes mistakes. It’s human nature. But if you make an error with your pension, you could end up paying for it for the rest of your life. To help you make the most of your pension, make sure you don’t fall for these costly mistakes.
We hope you find this helpful, but it’s not personal advice. You can’t normally access money in a pension until at least age 55 (57 from 2028). Pension and tax rules can change, and benefits depend on your circumstances. If you're not sure what's right for your situation, please seek advice.
1. Don’t miss the opportunity to cut your tax bill
Whenever you pay into a pension, you’ll get a top up from the government in the form of tax relief – slicing down your tax bill one payment at a time.
If you're a UK resident under 75, you can usually pay in as much as you earn, up to £60,000 a year, and get basic-rate tax relief (20%). Even children and other non-earners can contribute up to £3,600 (you pay £2,880, the government adds £720 in tax relief).
If you pay higher-rate tax (40%), you can claim up to an additional 20% in tax relief through your tax return or local tax office. If you pay additional-rate tax (45%), you can claim back up to an extra 25%. You must pay enough tax at the relevant rate to claim back the full amount. Different income tax rates and bands apply for Scottish taxpayers.
Come January, when most tax bills need paying, you might be grateful for the extra money you can claim back because of the contributions you make now.
2. Don’t fall into the trap of not saving enough
We all have dreams about what our retirement might look like, yet the majority of us don’t know how much to save for the income we might need or want when we finally retire. As a rule of thumb, over a 50-year career you should aim to save around 12% of your earnings each year. Your ideal retirement pot depends on your lifestyle goals.
Once you’ve decided how much income you might need or want in retirement, it’s a good idea to check if your pension is on track. Our pension calculator can help you work out how much your pension could pay in the future. And if it isn’t on track, we offer some tips to help get you there.
3. Don’t let investment decisions delay your pension contribution
Making a pension contribution and securing your allowances and tax relief each tax year doesn’t mean you need to rush into making investment decisions. Sometimes our clients make a pension contribution, secure up to 45% (or 48% for Scottish taxpayers) tax relief before the deadline and decide where they want to invest later.
You’re able to hold cash in the HL SIPP while you make your decision. And if you’re looking for inspiration, you could check out our SIPP investment ideas.
Please remember that although there is the potential for growth, investments can go down as well as up in value, so you could get back less than you put in.
4. Don’t leave your pension contribution to the last minute
Many people leave their pension contributions until the last few weeks in the tax year. But it could actually pay to make a contribution earlier. Investing earlier gives you a better chance of reaching your goals sooner. The longer your money is invested, the more time it has to grow. Finding money to set aside into your pension isn’t always easy – especially if you have other financial commitments, but it can be done. You could try these saving habits:
1. Pay in more when a regular outgoing has come to an end
If you pay for something on finance, or you’ve finished paying off a debt, or mortgage, you could think about redirecting the regular cost into your pension. Even the smallest of increases can make a huge difference – especially over the long term.
2. Use a pay rise or bonus as an opportunity to save
It can be difficult to prioritise saving a percentage of your income each month, but you could use a pay rise or bonus as an excuse to save. Some employers even offer a bonus sacrifice. This works in a similar way to salary sacrifice. You can choose to give up some or all of your bonus and pay it into your pension. You’ll benefit by not having to pay National Insurance or income tax on the amount you give up.
With HL, you can choose to make a one-off lump sum contribution from £100. Or you can spread your contributions over the year by investing on a monthly basis. This is great for people who want to invest, but don’t have lump sums of cash available. You can start a Direct Debit with as little as £25 a month. It’s also a good option if you’re not sure whether now’s the best time to invest.
How to make a SIPP contribution
Find out more about investing monthly
5. Don’t forget to use unused pension allowances
This can be particularly relevant if you’ve inherited large sums of money or if you’re a high earner. A pension rule lets you take advantage of any unused allowance from the previous three tax years – it’s called the carry forward rule. Let’s say the annual allowance was £60,000 for the previous tax year and £40,000 for the two tax years before that, it means you could invest up to an extra £140,000 in your pension. Effectively, you’d pay in up to £112,000, with the government adding £28,000 basic-rate tax relief to the pension. If you’d paid additional-rate tax on all of it, you’d also be entitled to £35,000 further tax relief outside of the pension.
To use carry forward, there are two requirements:
1. You had a pension in each year you wish to carry forward from, whether or not you made a contribution (State Pension doesn’t count).
2. You have earnings of at least the total amount you are contributing this tax year. Alternatively, your employer could contribute to your pension.
Pension carry forward calculator
