Expert reveals three common pension mistakes that could cost you thousands

Brits have been warned of common pension mistakes which could result in thousands of pounds lost by retirement age. Being unaware of the future changes to taxation, which will see pensions included as part of your estate, along with other factors, could be a costly mistake, according to a financial expert. Antonia Medlicott, Managing Director of Investing Insiders, has revealed the three most common pension errors, and how to avoid them.

Most pension providers will have multiple pension funds for you to invest your money in, and being in one that is poorly performing may mean you miss out on hundreds of pounds. It's estimated that over 10 years, the performance gap between top and bottom decile funds is 5.5% per year. With the average pension contribution being around £2,100 a year in the UK, this means you would be £115.50 better off annually in a higher-performing pension fund. Over 10 years, this would be £1,155.

Ms Medlicott says to discover where your pension is invested by reviewing your annual paperwork from your pension provider, or alternatively, you can log in to your online account and check there.

Once you have found your pension, you can then compare its performance against other accounts.

Secondly the expert urges against withdrawing pension savings early, which can result in tax penalties. Taking out your pension before the age of 55 is seen as an 'unauthorised payment' which HMRC charges 55% tax on, Ms Medlicott says.

For example, if you decided to withdraw £30,000 from your pension pot early, you'd end up paying £16,500 in tax. But waiting until at least 55 will mean you only pay £4,500 in tax.

Forgetting about inheritance tax pension changes is a new way in which money can be lost. From April 2027, pensions will become a part of someone's estate and, therefore, be subject to inheritance tax. Ms Medlicott says that one way to minimise this is to take advantage of IHT gift rules, which allow for annual gift allowances, as well as larger sums of money, as long as the subject survives at least seven years after.

Doing this will reduce the amount of tax that you will pay after your death, as you can gift £3,000 per year tax-free to one person, then up to £250 to multiple different people.

This reduces the overall amount of inheritance tax you will have to pay, as ultimately there will be less money in your 'estate'. The amount you save depends on how much you gift and how much you already have in your pot.

In the UK, the average amount left in a pension pot when someone dies is between £50,000 and £150,000. So, if someone dies with £100,000 unused, assuming that they also had the national average estate at death of £335,000, of that £100,000, £30,000 would then be paid in tax.