Pension Drawdown is a way to receive income on a regular basis from your personal pension pot. Notably, whilst keeping it invested so your capital can continue to grow. In short, the percentage growth of the fund will be dependent on market performance. If your investments do well, your pension fund can carry on growing. Chiefly, this means your retirement income will increase too. Conversely, the value of your income could also go down if your investments do badly. Noticeably, more and more people are accessing their pension pot before the state pension age.

Here are some common Pension Drawdown mistakes to be aware of:

1. Money Purchase Annual Allowance

From 6th April 2023, you can get tax relief on pension contributions up to £60,000 a year. Previously this was £40,000 on your total earnings, whichever was the lower. But if you start taking income from a defined contribution pension scheme, you could trigger the money purchase annual allowance (MPAA). Consequently, this will reduce your yearly pension allowance to £10,000. This has been increased from £4,000.

2. Emergency Rate Income Tax

Many retirees may not be aware that when they opt to draw lump-sum payments from their pension pots, an emergency rate income tax is applied. According to HMRC, this is done as there is not enough information about the pension saver’s overall tax position in the first year of drawdown. Most importantly, the tax deducted from your pension lump sum will almost certainly be too much. As a result you must make sure you get this money refunded from HMRC.

3. Taking too much tax-free cash all at once

Tax-free cash is the amount of money available ‘tax-free’ to the pension saver as a lump sum after the minimum pension age. Normally this limit is 25% of the value of the pension subject to the available lifetime allowance. Notably, you maybe able to draw money out of your ‘pot’ flexibly – as much as you like, when you like, from age 55. But do not rush. Making a hasty decision could cost you heavily in the form of an unwanted tax bill. However, tax if not the only factor. There maybe other reasons you need more money sooner. Indeed there maybe possible future changes in your circumstances and you will have other investment-based issues to think about.

4. Choosing the Wrong Investments

Before you make any investment decision, sit down and take an honest look at your entire financial situation. The first step o successful investment is figuring out your goals and risk. In short, there is no guarantee that you’ll make money from your investments. But if you get the facts about saving and investing and follow through with an intelligent plan, you should be able to gain financial security over the years and enjoy the benefits of managing your money. Some investors are choosing investments that are best for the long term. As a result, rather than short-term income needs. Hence, it is important to understand what your long and short term goals are.

5. You do not have to take all of your tax-free cash in one go

If you have no immediate plans to use the cash, it is best to leave your money invested in portfolios made up of equities and bonds. This should give you a higher return than cash in the bank over the long term. If your money stays in your pension pot you won’t pay tax on it. You will also get tax relief on the contributions you make. Furthermore, it maybe possible to ‘mix and match’ what you do with your pension pot at different points in your retirement. Accordingly, take time to think about the benefits and considerations of each option.

6. Not taking financial advice

Making the right decision on your retirement savings is of great importance. Dealing with your finances can be a complex matter. Consequently, there’s a lot to consider, and the decisions you make, or don’t make, will ultimately define your future. So, getting it right is paramount.

Therefore, it is important to find a Financial Adviser whom you can trust in guiding you through your retirement journey. At Iceni Financial Advisers we have a genuine interest in our client’s financial planning. We want to make sure they avoid some of the common mistakes people tend to make when they are considering pension drawdown. Notably, things to be aware of when drawing down on pension.

We are award-winning, full regulated and trusted pension specialists. To find out more about how we can help you will your financial and pension needs, please call us on 01603-957599. Contact us to arrange your Free Initial Consultation.