Pensions can feel overwhelming, but understanding your retirement pot is crucial. Here are five common mistakes that millions of people make, potentially costing them thousands of pounds.
1. Turning Down Free Money from Your Employer
All employers must automatically enrol eligible workers into a workplace pension scheme. This involves you saving part of your salary, but your employer also contributes. The minimum auto enrolment contribution is 8% of qualifying earnings, with employers paying at least 3% and you paying 5%. Crucially, your contribution is deducted before tax. If you contribute £100 monthly, the full amount goes into your pension. If you received that as salary and are a basic 20% rate taxpayer, you would get only £80. You are automatically enrolled if you are aged 22 to state pension age and earn at least £10,000 per year.
2. Losing Track of Your Pension Pots
It is easy to forget how many pensions you have, especially after changing jobs. According to 2024 research by the Pensions Policy Institute, an estimated £31.1 billion sits in lost or unclaimed pension pots. The free Government Pension Tracing Service can help you track down lost pensions. Provide your previous employment details, and the service will give you the contact information of the provider. It won't reveal how much you have invested; you must contact the administrator yourself. A new pensions dashboard tool launching this year will let you see all your pension information in one place. All schemes must be connected by October 31, 2026.
3. Underestimating How Much You May Need
Pensions UK expects around 82% of the working population to reach at least the minimum standard of living in retirement, but only 23% to achieve a moderate standard and less than 10% a comfortable lifestyle. The Pensions and Lifetime Savings Association has updated figures: for a minimum retirement living standard, a single person needs £13,900 per year, a couple £22,500. For a moderate lifestyle, one person needs £32,700, a couple £45,400. For a comfortable retirement, a single person needs £45,400, a couple £62,700 per year.
4. Name Your Beneficiaries
Most private and workplace pensions are separate from your will. Your retirement savings could go to an unintended person or an ex-partner if you don't keep your documents up to date. An expression of wish form tells your pension provider who you want to receive your savings if you die before retirement. While not legally binding, it guides the provider. You can nominate one or multiple people and specify the percentage split. Each provider has its own form.
5. Not Using Your Pension Allowances
Most people have an annual allowance of £60,000 for pension contributions before tax. Your allowance may be lower if you have a high income or have flexibly accessed your pension. You will usually have a tapered annual allowance if your threshold income exceeds £200,000 and your adjusted income exceeds £260,000.
