How to avoid seven common retirement mistakes

In addition to the complex nature of retirement decisions, much is at stake in terms of getting things right.

| 8 min read

The journey into retirement is often an uncertain one. It can even be an ‘expedition’ into the unknown, which is why many people worry at some point about making a mistake with their retirement savings.

For starters, there are a lot of variables outside your control such as how your cost of living might change and your state of health. The journey also has a non-fixed conclusion. To put it bluntly, no one knows how long they will live. Unlike an explorer setting out to conquer a mountain or follow a river to its source, your journey may have a range of outcomes rather than a single endpoint.

In addition to the complex nature of retirement choices, much is at stake in terms of getting things right. Decisions made at retirement, and in the years immediately before and after, can have significant consequences for the rest of your life. Although flexibility can often be built in, decisions are sometimes ‘one offs’ that can’t be reversed. With this in mind, here are seven of the most common retirement mistakes, giving you an idea of what not to do when you retire.

Seven common retirement mistakes

Couple talking to a professional about retirement mistakes

1. Not being prepared

Like any journey, you can at least plan for what you might encounter. You can pack the right things to take with you and allow enough budget for any missteps. Setting off into retirement without a plan may not be as potentially fatal as forging into a dense jungle without one, but it can be really detrimental to your long-term wellbeing. Maximising the resources at your disposal is crucial, and it can put your mind at rest that you have done all you can.

It is therefore important to review your pension situation regularly. If you find you have a shortfall, you may still be able to take steps to increase the chances your pension pot will be able to achieve the income you want when you retire. Our pension calculator can help you avoid retirement planning mistakes.

Pension contribution calculator

2. Underestimating life expectancy

Many people underestimate the length of their retirement. On average, people aged 55 today will live to their mid-80s, but there’s a 1 in 10 chance of surviving into the mid to late nineties. So, if you are retiring at 65 and you are in good health, you should really be planning for up to 35 years.

The Office of National Statistics calculator can give an estimate of average life expectancy. The longer you leave the money invested in your pension and continue to pay into it, the higher your income could be when you choose to take it. It is also important not to take too much of your pension money in early retirement as this could mean you won’t have enough for later.

3. Underestimating the cost of living

Everyone’s circumstances, needs and desires in retirement are different, but with lots of extra free time on your hands you may need more money than you think. Remember too that income is needed for your whole lifetime, and a lot can change.

Rises in the cost of living can erode the spending power of cash, and the cumulative effects of inflation can be dramatic over time. It is important to strike the right balance between retirement goals such as leisure pursuits or travelling and the requirements of later life when long term care costs may need to take precedence.

4. Getting your investments wrong

It is vital to ensure your retirement investments remain appropriate for your needs. In particular, in the run-up to retirement, it may be prudent to gradually alter the asset mix in order to meet your objectives during retirement. For instance, if you are planning to buy an annuity (an insurance policy that gives you a guaranteed, regular income for the rest of your life) it may be worth reducing investment risk. However, if you are primarily going to be drawing on your pensions via drawdown then you will need an appropriate strategy that takes sufficient risk to grow your pot but avoids excessive volatility and loss of capital.

5. Not assessing all your retirement options

When you are preparing for retirement, you have lots of decisions to make, not least how to convert your pension pot into retirement income. In addition, you need to consider your other assets such as savings and investments as there may be tax benefits to keeping money inside a pension and utilising other means to fund retirement.

Whether you choose to buy an annuity (a guaranteed income for life with access to capital given up), draw an income from your pension investments via drawdown, or a combination of the two, it is worth spending time assessing all the options to make sure you are selecting an appropriate route. If you are uncertain as to which option or options are suitable you should seek professional financial advice.

If you are buying an annuity, it is important to shop around for the best deal. Rates vary between providers, and if you are a smoker or have a medical condition, you could qualify for special rates with some providers.

If you are considering a drawdown pension, you’ll need to be involved in choosing and managing your investments, or get financial advice that covers this for you. For a comprehensive retirement plan that will help you plan for your retirement and minimise the risk of outliving your money, it is worth considering regulated financial advice. Our consultants can help you to understand your options and plan your retirement.

Pension Drawdown calculator

6. Paying more tax than necessary

Under current rules, once you reach normal retirement age you can normally take an invested pension pot such as a SIPP as cash in one go. However, generally 75% of this sum is taxable and is added to other income in the tax year it is received, so it could push you into a higher income tax band.

You can ‘phase’ your pension in retirement by taking both the 25% tax-free lump sum and taxable income in stages. Spreading withdrawals over multiple tax years in this way can mean you make the most of tax allowances and avoid paying more tax than necessary.

How does a SIPP work?

7. Falling victim to a scam

According to the Financial Conduct Authority (FCA), nearly a fifth of over 55s and a third of over 75s believe they have been targeted by an investment scam in the last three years. The ability to take a pension pot as cash in one go means that people with this type of pension could be targets for fraudsters.

To guard against being a victim of investment fraud, the FCA advises consumers to, at the very least:

  • Reject unsolicited contact about investments.
  • Before investing, check the FCA Register to see if the firm or individual you are dealing with is authorised and check the FCA Warning List of firms to avoid.
  • Get impartial advice before investing.

There is more information on how to spot and avoid fraudulent investments on the FCA website.

What sort of retirement can you afford?

Couple sitting on a boat during their retirement

When thinking about how to draw an income from your retirement savings, regulated financial advice can make sure you take the right decisions for you and your family.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

Guide to Pensions & Retirement

To help with your retirement planning, we've put together a comprehensive guide. Download today and get expert tips on how to build a solid financial plan for your future.

See more

The information in this article is based on our understanding of UK Legislation, Taxation and HMRC guidance, all of which are subject to change. The tax treatment of pensions depends on individual circumstances and is subject to change in future. This article is solely for information purposes and does not constitute advice or a personal recommendation.

More insights

Five investment trends defining the first half of 2024
By Rob Morgan
20 Jun 2024 | 12 min read
China’s central bank criticises Fed policy
By Charles Stanley
20 Jun 2024 | 16 min read
G7 backs Ukraine and tackles migration
By Charles Stanley
17 Jun 2024 | 6 min read
Wall Street continues record-beating run
By Garry White
Chief Investment Commentator
14 Jun 2024 | 12 min read