Three 'common' pension mistakes that could cost you 'thousands'

Pension savers have been warned of three "common" mistakes that cost them thousands of pounds in the long run. From reviewing investment accounts and fees to withdrawing savings early, several factors must be considered and planned to ensure the best possible retirement, an expert has said.

Antonia Medlicott, managing director of financial education specialists Investing Insiders, said: ''Pensions are an important part of all of our futures, so it's important that we are aware of the common mistakes that could lose us money. With some of these being as simple as not withdrawing your pension before a certain age, make sure to keep yourself informed about any future pension changes, as recent trends seem likely.''

Most pension providers will have multiple pension funds for savers to invest their money in.

Ms Medlicott said: "Spend time researching the best-performing fund, instead of just opting for the default fund. It might be the easy option to let someone else choose your fund for you, but our research shows it's not always the best performing fund."

People can check where their pension is invested by reviewing their annual paperwork from the pension provider or logging in to their online accounts.

Ms Medlicott said: "Once you have found your pension, you can then compare its performance against other accounts."

She added: "It's estimated that over 10 years, the performance gap between the best and worst performing funds is 5.5% per year. With the average pension contribution being around £2,100 a year in the UK, this means you'd be £115.50 better off annually in a higher-performing pension fund. Over 10 years, this would be £1,155."

Currently, people can access their private pensions when they reach the age of 55. This will increase to 57 from April 2028. Withdrawing money before this can result in "severe tax penalties."

Ms Medlicott said: " It's seen as an 'unauthorised payment' on which HMRC charges 55% tax."

However, she noted: "When you wait for retirement, you get benefits like 25% of your pension pot being tax-free [up to a cap of £268,275], with the rest depending on what rate it falls in. For example, if you decided to withdraw £30,000 from your pension pot early, you'd end up paying £16,500 in tax."

Ms Medlicott added that it's also "imperative" to check you're not paying too much in fees, as this could cost you thousands of pounds more overall.

Investment fees are charged from your pension provider to cover the cost of managing and investing your savings, usually taken as a percentage of your total pot or as a fixed monthly or annual fee.

A new analysis from investment firm Vanguard showed that lower charges could significantly increase the size of a person's savings pot. According to its calculations, reducing annual pension fees from 1% to 0.5% could add at least £59,000 to a saver's retirement pot over their career.

For example, someone earning the UK average salary of £37,500 and contributing £250 per month into their pension from age 25 to 66 could accumulate £465,000 by retirement, assuming a 6% annual return and a 0.5% fee.

However, a 1% fee would shrink the pot to £406,000, and a 1.5% fee would further reduce it to £355,000. James Norton, head of retirement and investments at Vanguard Europe, shared three ways to check you're not paying over the odds.