We don’t support this browser anymore.
This means our website may not look and work as you would expect. Read more about browsers and how to update them here.

  • A A A
  • 4 costly retirement mistakes and how to avoid them

    Here are four common retirement mistakes and how to avoid them.

    Last Updated: 26 March 2024

    Mistakes happen. It’s human nature. But if you make a slip-up when you take money from your pension, it could cost you later down the line.

    It’s important to understand your options, and the help available to you so you can avoid falling for these costly mistakes.

    We hope you find this article helpful, but it isn’t personal advice. If you’re not sure how to take money from your pension you should seek guidance from Pension Wise or seek personal advice. Pension and tax rules change, and benefits depend on your circumstances.

    1. Don't choose the wrong option

    What you decide to do with your pension, and how you choose to take money out is an important decision. If you get it wrong this could be a very costly mistake and could seriously impact your lifestyle in the future.

    There are three main options to choose from, each with their own risks and benefits. If you choose to keep your pension invested, you need to be comfortable with the fact that all investments can rise and fall in value. You must be happy to accept that although there is growth potential, it is also possible to get back less than you invest. The three main options are described below and are usually available from age 55 (rising to 57 in 2028).

    Drawdown is the most flexible way to take an income from your pension. You can take up to 25% of your pension as a tax-free lump sum (up to a maximum of £268,275 for most people), and the rest is moved into drawdown and stays invested. You can do this in stages or in one go. Your personal contribution allowance is unaffected until you start to withdraw a taxable income (or you flexibly access benefits elsewhere). You choose how much income to take, and when. Anything left in the pension when you die can be passed on to your loved one’s tax efficiently.

    The lump sum (UFPLS) option is also flexible and allows you to keep whatever you don’t withdraw invested and pass on anything left over tax efficiently. The difference is, up to 25% of each withdrawal will be paid tax free, and the rest taxed as income. This is classed as a flexible option, so will reduce your personal contribution allowance straight away.

    If you want a guaranteed income for life an annuity is a good option. Annuities are one of the only ways to get a secure income in retirement, that can also be linked to inflation. When using the money in your pension to buy an annuity, you can usually choose to have up to a quarter (25%) of the amount paid to you as a tax-free cash lump sum (up to a maximum of £268,275 for most people), and use the rest to buy the annuity. The annuity income you receive is then taxed as earned income.


    2. Don’t put off guidance or advice

    Getting some guidance on your retirement options could help you to make the right decision with confidence. We have lots of free tools and guides to support you, but we also think it’s important to get guidance from Pension Wise.

    From age 50, anyone with a defined contribution pension can 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.


    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 up your retirement income or investment plan, or you think you’d benefit from on-going financial reviews – you’ll only pay for the level of advice you choose.

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


    3. Don’t buy into an annuity without shopping around for the best deal

    Most people tend to shop around for the best deals before they buy things. The same is true when it comes to buying an annuity.

    There’s no obligation to buy your annuity from the same firm that provides your pension. In fact, it’s likely you’ll get a better rate if you shop around.

    Also make sure you add your health and lifestyle details when you get a quote. Even if you confirm minor details like your height, weight, or how much you drink or smoke it could mean you’ll qualify for a higher income.

    There are several annuity providers in the open market and each one will offer you a different annuity rate. This means each provider could offer a different amount of income.


    It’s easy to shop around using our online annuity tool. You’ll get instant quotes from some of the UK's leading annuity providers in minutes. All you need to do is answer some questions about yourself and your pension. Annuity rates move regularly and once set up, an annuity can’t usually be changed so it’s important to consider your options carefully.

    It’s a good idea to get regular quotes on the run up to retirement to make sure you know what’s on offer and help you plan. It won’t cost you a thing.


    4. Don’t forget 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. And over the long term, increasing prices can have a big impact on how far your retirement income will go.

    Over the past 30 years the price of goods and services has roughly doubled. Goods and services costing £10 in 1993 would now cost you nearly £20.

    How to shelter your pension from 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. Triple lock rules guarantee that State Pension payments will increase in line with either CPI measure of inflation, average UK earnings in the previous year, or 2.5% (whichever is highest). This means that from 8 April 2024, the State Pension will rise by 8.5%, putting the maximum amount you can receive at around £11,500 a year.

    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 by 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 at a fixed rate each year, and you will normally have the option to increase it by either 3% or 5%. 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. Choosing one of these options means you’ll start off with a lower income, but it will be better protected against inflation.


    What did you think of this article?

    Related articles

    Why consolidating at retirement is important

    One of the most crucial times to consolidate your investments and pensions is as you approach retirement. Discover why, plus find out about our latest transfer offers.

    Isabel McDougall

    3m read

    Are you taking enough risk?

    Deciding how much risk to take when investing in retirement can be tricky. We look at how you can decide what level of risk is right for you.

    Alexandra Mears-Jennings

    6m read

    Have you taken more tax-free cash than you needed?

    Learn how to calculate the right amount of tax-free cash for you, and what you could do if you’ve taken too much.

    Guy James

    6m read

    How to generate an income from your investments in retirement

    Discover strategies for taking an income in retirement, and what to do when it’s not enough.

    Isabel McDougall

    3m read