Drawdown nightmare – this mistake will cost you £12,300 in lost pension. ‘Easily avoided’

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Drawdown is an effective strategy but savers risk throwing money away by making simple mistakes. One of the simplest errors will cost you £12,300 in lost pension income, but others can be even more costly.

Making a pensions mistake in the years before you retire can be an expensive nightmare, said Jonathan Watts-Lay, director at retirement specialist WEALTH at work.

“We spend many years saving for retirement and it is heart-breaking when people make mistakes which could have easily been avoided.”

A common mistake is underestimating how long you are likely to live after you stop working.

Life expectancy in the UK for people aged 65 is now 85 years for men and 87 years for women, official figures show.

That means your pension must stretch for at least 20 years. “If you draw down too much income in your early years, you risk running out of money in later life,” Watts-Lay said.

This isn’t the only danger.

Another drawdown disaster sees people paying too much tax on the income they take from their pension.

You can take the first 25 percent of your pension free of tax, in a defined contribution scheme, but the remaining 75 percent is added to your income tax for that year and taxed accordingly.

Those who draw down large sums will drive up their annual income for that year and may pay income tax at a higher rate. “Basic rate 20 percent taxpayers could suddenly find themselves paying 40 percent tax as a result,” Watts-Lay said.

“You may be better off taking a smaller amount each year from your pension, keeping within your tax bracket, and then to top it up with withdrawals from other sources such as an Isa, as this is paid tax free.”

The third big mistake is failing to shop around at retirement for the best value products, such as drawdown or annuity plans.

READ MORE: Avoid the National Insurance and income tax hike – and boost pension

There are other pension dangers to avoid as you approach retirement, he added.

“Scammers often use highly professional looking websites and marketing literature to lure you in, and tend to sound completely legitimate when they contact you.”

It is easy to be fooled, and the losses can be huge, Watts-Lay said. “Between January and May 2021, pension scam losses totalling over £2.2 million were reported to Action Fraud.”

The real figure is likely to be much higher as many people are reluctant to admit they were duped.

The financial decisions you make up in the run-up to retirement are among the most important of your life. So take time to avoid the pitfalls and get free, impartial Government-funded Pension Wise guidance from MoneyHelper.org.



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