Our expert looks at three top mistakes to avoid with your retirement fund
Thursday 17 Oct 2019 Author: Tom Selby

I often read experts giving their ‘top tips’ for pension saving and drawdown, but what are the things I should avoid doing with my retirement pot? I’m thinking mainly about drawdown as I’m approaching my 60th birthday and plan to retire at 65.


Tom Selby, AJ Bell Senior Analyst says:

Here are three of my top mistakes to avoid with your hard-earned retirement fund.

1. Don’t spend it all at once

While some people will be lucky enough to have significant defined benefit entitlements which mean they can spend other funds relatively quickly without being left short of income, most will need their defined contribution pension (or pensions) to last throughout their retirement.

To do this you need to manage withdrawals in a sensible way and review your portfolio and withdrawal strategy regularly.

As well as the risk of running out of money early, there could also be tax consequences if you take out most or all of your pension in one go. While 25% of your pension withdrawals are tax-free, the remaining 75% are taxed as income, so watch out for any withdrawals which push you into a higher tax bracket unnecessarily.

2. Don’t invest in cash for the long-term

For those in drawdown, holding some cash is necessary to pay yourself an income and any associated fees to your provider. However, cash is a lousy long-term investment as it usually offers little or no returns and can be ravaged by inflation.

As an example, if you held £100,000 in a cash account paying 0.5% and inflation ran at 2% during that period, your fund would be worth around £86,000 in real terms after 10 years.

By diversifying your investments between different stocks and bonds spread around the world, you can grow your pension over time. At the very least long-term investors should be aiming to protect the value of their pension from rising prices.

3. Don’t transfer out of a pension and into another financial product for no reason

Pensions suffer from a trust issue which goes as far back as Robert Maxwell and the Daily Mirror pension scandal in the 1980s.

As a result, some savers rush to whip their money out of their retirement pot at the earliest possible opportunity and shove it straight in a similar tax wrapper such as an ISA or, even worse, a bank account paying little or no interest.

In most circumstances this is likely to be a monumental error. Firstly, you’ll risk paying thousands in unnecessary tax when you make the withdrawal for no discernible benefit.

Secondly, those who stash the money in a bank account risk seeing their pot routed by inflation over the long-term.

And finally, by accessing taxable income from your pot you will trigger the money purchase annual allowance (MPAA), meaning you’ll only be able to pay £4,000 a year into your pension rather than the usual £40,000.


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Please note, we only provide guidance and we do not provide financial advice. If you’re unsure please consult a suitably qualified financial adviser. We cannot comment on individual investment portfolios.

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