‘You can’t come back from this!’ – The ‘biggest’ pension mistakes retirees make

Financial expert James Shack explained many people seek guidance from him when planning their retirement to avoid simple mistakes, however there are a growing number of people who present problems that he “cannot fix”. These are mistakes that cannot be undone and can seriously jeopardise one’s future, he warned. Worryingly, it could potentially negatively impact their retirement and drain their pensions.

In a recent YouTube video, he discussed the three biggest defined contribution pension mistakes that some of his retiree clients made and explained how and why they should try to avoid them.

1. Cashing in an entire pension as a lump sum
Mr Shack explained that one retiree withdrew their whole £200,000 pension to invest it into a buy-to-let property.

The man received £50,000 tax free whilst the rest was taxed as if he had earned the income in that single year.

As the man was still working, and was a high-rate taxpayer, he ended up paying £67,000 in Income Tax meaning he was only left with £132,000.

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Additionally, as he was still employed, him and his employer were still putting £15,000 a year into a separate pension, but as he had already flexibly accessed his other pension, there is now a limit into how much he can put into his pensions of £4,000. That means £11,000 of his money is being taxed.

Mr Shack said: “Not only has he paid £67,000 upfront pension tax, but he also then has to pay £4,500 in tax every single year that he continues to work that otherwise he wouldn’t have had to pay.

“There is no way you can come back from this.”

2. Using tax free lump sum to pay off mortgage

Additionally, another mistake Mr Shack has witnessed is retirees wanting to pay off their mortgage with their tax-free cash lump sum from pension.


The next example he gave was a couple who had £250 a month payment on a 1.25 percent interest only mortgage that they did not want hanging over them in retirement. They ended up taking £200,000 of tax-free cash from their pensions to pay it off.

He said: “We have £200,000 coming out of a tax-free growth environment, so if invested correctly, that could potentially see an average of let’s say six percent return and turn into £250,000 eventually over the years.

“At the same time that £200,000 mortgage has an interest rate that is, as I speak, less than the rate of inflation which means that each year that goes past, that debt is becoming smaller and smaller in real terms.

“So, you’re taking £200,000 out of a unique, tax efficient investment opportunity to pay down a debt that is in real terms earning you money.

“So, another option could be just to keep that £200,000 invested and find a way to cover those mortgage payments or you could drawdown just enough each year from your pension to cover the payments.

“This may not be the right solution for everyone but interest only mortgages can be a great tool to access money that’s tied up in your home, especially when you’re planning on downsizing in the future anyway.”

3. Taking tax free cash to top up ISAs

Many people prefer ISAs to pensions as they may be easier to understand. With a £20,000 limit each year it could be tempting to want to use tax free pension cash to top this up however Mr Shack explained “this is a bad idea.”

Pensions have all the same tax benefits of an ISA, but pensions have an additional benefit that make them “far more superior” than ISAs, he suggested.

He also explained the benefits of pension inheritance. People that die before 75 can pass their pensions onto a loved one free of tax.

People who die after 75 can inherit the pension without any Inheritance Tax also but they will have to draw it down and pay Income Tax at their own marginal rate.

ISAs however form part of one’s estate and people may have to pay Inheritance Tax on them.

Mr Shack added: “This is why it may be preferable to sell down your ISAs before your pensions when you’re creating a retirement income. In fact, sometimes you don’t want to be touching pensions at all because they are such great inheritance tax vehicles.”

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