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4 costly retirement mistakes and how to avoid them

We take a look at four common retirement mistakes and how to avoid them.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Over the past couple of weeks lots of people have been faced with the reality of delaying their retirement. The value of their pensions is likely to have dropped following the recent market volatility, and it’s uncertain what the future holds – so it might not be the best time to give up work or take reduced hours.

That being said, it doesn’t mean you should cancel your pension contributions and stop retirement planning.

If you want to get ahead so you’re ready to retire when the timing is right, or you’re still hoping to retire later on this year, we explain how you can make the most of your pension, by avoiding four common retirement mistakes.

This article isn’t personal advice. There’s more information below on taking advice or guidance if you’re unsure. Tax rules change and benefits depend on individual circumstances.

1.Not choosing the right retirement option for you

If you get it wrong this could be a very costly mistake and could seriously impact your lifestyle in the future. But with so much freedom and flexibility, it’s not always easy to know where to start, or how to choose the right retirement option.

Most retirees now have a great deal of choice over how they can take an income from their pension, and understanding these options is vital in helping you choose the right one.

From age 55 (rising to 57 in 2028) you can normally take up to 25% of your pension tax free. Then there are three main options to choose from – drawdown, lump sums (UFPLS) and buying an annuity.

Drawdown is the most flexible way to take an income from your pension. After you take your tax-free cash, the rest of your pension stays invested. You can then choose how much income to take (which is taxable), as and when you need it.

Although it offers flexibility, drawdown is more complex than other options and the income isn’t guaranteed so it’s riskier. The value of your pension will be based on the investments you choose. And if the past few weeks have taught us anything, it’s that the stock market can be very volatile. If you choose drawdown you need to be comfortable that the markets and the value of your pension will fall as well as rise.

But if you don’t want to worry about the stock market you could think about buying an annuity. Although this has become the less popular retirement option, recently it might seem more attractive, despite low rates. That’s because once you buy an annuity, you’ll get a secure income for the rest of your life. It doesn’t matter how long you live, or how the markets are performing.

Another option to think about is taking lump sums (UFPLS) directly from your pension. 25% of the lump sum you take will usually be tax free and the rest (75%) will be taxed as income. This option also means you’d be keeping your pension invested, so make sure you’re comfortable with the risks.


2. Not getting guidance or advice

Getting some guidance on how pensions work, and your options will also help you make the right decision. We have lots of free tools and guides which could help, but we also think it’s important you get guidance from Pension Wise.

From age 50, anyone with a defined contribution pension is able to book a free session with Pension Wise. It’s free and impartial guidance offered by the Government to help you make sense of your options.

More about Pension Wise

You could also think about financial advice. Retirement is a time when advice could be worth paying for, as there is so much at stake if you get it wrong. Having an expert provide you with a plan can give you the peace of mind that the decisions are right for you.

Our advisers are here to help. Whether you’re after one-off advice to help set you up for retirement, or you think you’d benefit from on-going financial reviews throughout – you’ll only pay for the advice you need.

To find out if advice could be right for you, the first port of call is to speak to our advisory helpdesk. They’ll explain what you could gain from getting advice and put you in touch with an adviser if you think you could benefit from advice.

Book a call

3. Not shopping around for the best annuity deal

Before you buy most things, it’s likely you’ll shop around. You’ll want to make sure you’re getting the best deal out there. So why should it be any different when it comes to your retirement income?

There’s no obligation to buy your annuity from the same firm as the one that provides your pension. In fact, if you’re thinking about buying an annuity make sure you shop around first to get the best deal available.

There are currently six annuity providers in the open market and each provider will offer you a different annuity rate. This means you’ll get more or less income depending on what provider you choose. The difference can be huge – just look at the graph below.

Annual annuity income from a £100,000 pension

We generated these quotes using our online annuity quote tool on 5 May 2020. All quotes are for a single life annuity, paid monthly in advance, with no escalation or guarantees built in. Quotes are for a single 65 year old who lives in an area which has an average life expectancy. We've also said they drink 14 units of alcohol a week and have high blood pressure and high cholesterol.

It’s easy to shop around using our online annuity tool. We do all the hard work for you. We’ll get you instant quotes from all six annuity providers in minutes. All you need to do is answer some questions about you and your pension. Annuity rates change regularly and once set up, they can’t usually be changed so it’s important to consider your options carefully.


As well as shopping around make sure you add your health and lifestyle details when you get a quote. Even providing minor details like your height, weight, or how much you drink or smoke could mean you’ll qualify for a higher income.

We think it’s a good idea to get quotes regularly on the run up to retirement to make sure you’re aware of what’s on offer for you and help your planning. It will help you keep an eye on ever-changing annuity rates and it won’t cost you anything.

4. Forgetting about inflation

The price of goods generally rises over time – known as inflation. But it can be easy to forget about inflation when you’re planning for retirement.

Inflation will affect how much your money will really be worth. Over the past 30 years the price of goods and services has roughly doubled. In 1990 a pint of milk typically cost 25p, today it’s about 43p. Over the long term, increasing prices will have a big impact on how far your retirement income will go, so you might want to think about inflation proofing your income.

But how can you shelter your retirement pot against inflation?

This will really depend on the type of pension you have, and you could have a few different options.

Most people are entitled to the State Pension and it will form a vital part of their income in retirement. It’s currently protected against inflation by the ‘triple lock rule’. This means your State Pension income will increase by the higher of inflation, earnings growth or 2.5%. If you have a defined benefit pension it’s also likely to be protected. Each year the income you get will normally go up in line with inflation or a fixed percentage.

If you have a personal pension, you might decide to swap some of your pension for an annuity as you’re able to inflation proof your annuity income.

There are two ways you can do this. You can choose for your income to increase each year, and you will normally have the option to increase it by either 3% or 5%. This means you’ll start off with a lower income, but it will be better protected against inflation. Or you also have the option to link your income to the Retail Prices Index (RPI) so your income will retain its buying power by tracking inflation.

More on annuity options

For more retirement mistakes and how to avoid them download our guide


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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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