Four pension tasks you should complete right now – according to the experts

Pensions

In years gone by, many British workers could rely on generous defined benefit (DB) pensions when they retired. Often called final salary pensions, they’re linked to inflation and provide a guaranteed retirement income based on your final or average earnings.

However, they’re now rare outside the public sector after a range of factors, like spiralling costs and rising life expectancy, led to many firms abandoning them for defined contribution (DC) schemes.

As a result, it now falls to the individual to put money away and make the right decisions to build a pot that will last for the rest of their life – and most people aren’t saving enough.

With this in mind, Telegraph Money asked four financial professionals what people should do with their pension right now to help secure the retirement they want.

From turning down a vintage sports car to beating Labour out of the traps, here’s what they said.

Check your pension – particularly if you’re in your 50s

“People on the whole pay very little attention to their pension savings. Particularly now that auto-enrolment has been introduced, people think they are covered for the whole of their retirement without actually checking. This could cost them a substantial amount of money, or even cause them to run out.

“The problem with auto-enrolment is that it automatically assumes that everyone is the same. Your pension will be in a generic fund, just like everyone else in your age bracket.

“Left to its own devices, when you’re in your 50s and around 10 years out from your retirement date, your fund will start to aggressively de-risk.

“Probably five years out, it will mostly be in gilts or other ‘safe haven’ assets. This is called ‘lifestyling’, and it’s designed to stop you suffering large losses right before you’re about to retire, because your fund wouldn’t have time to recoup them before you drew it. The same will probably happen to all of your previous workplace pensions.

“The logic behind it is sound if you plan to take all of your pension at the retirement date your provider is expecting. However, times have changed and each person is different.

“You might not plan to buy an annuity, and [instead] intend to leave a particular pension until later in retirement, particularly as it can be passed on without inheritance tax if you die before that.

“If you don’t access your pension at the expected date, you run the risk of leaving your assets festering in low-risk investments, potentially for the decade running up to that and another 20 years or more on top. It might miss out on substantial growth, or even lose value by not even keeping pace with inflation.

“As you get closer to retirement, tweaking your pension’s investments so they’re better suited to your needs would put you in a much more comfortable position when you do draw it.”

Mr Rudden added that everyone should take a look at whether all of their pensions are on course to deliver for them, particularly in the latter years.

“Take the time to think about what your retirement would look like, how you would take your income, at which stage, and make sure everything is positioned to match those needs. If you need some financial advice, take it before it’s too late.

“Failing to look at your pension could mean you lose money, or even run out in retirement. If you don’t do it, no one will.”

Check your fees, and decide whether they’re worth it

All pensions come with management fees. These are generally deducted as a percentage of your pot annually, eating into your retirement fund.

Given the importance of decisions around pension planning, some people may also choose to use the support and guidance of a financial adviser. According to the Financial Conduct Authority (FCA), the average fee for FA services is 1.9pc of your fund.

As with anything you pay for regularly, it’s important to check you’re getting value for money.

Mr Russell said: “While lots of us have opinions on investment performance and service, many underestimate the impact fees can have on the long-term value of our pension. When reviewing a pension, it’s important to look at overall value for money, including service, investment returns and overall fees.

“A difference in fees of as little as 1pc can mean missing out on a third of your pension balance when you retire because of their compounding nature. While 1pc per year may seem small now, this could be the difference between retiring with a £450,000 pension pot or a £600,000 pension pot.

“But it is important not to look at fees in isolation, as the amount you pay will often depend on the service you receive, and better investment returns could offset the difference you pay in fees.

“The most crucial thing is to understand what your fees are paying for. It’s worth doing your homework to look at the overall value for money, making sure you have a good understanding of your pension, that it is competitive, taking into account service, investment performance and overall fees. This could save you thousands in the long run.”

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Move fast before the lifetime allowance comes back

The pension lifetime allowance (LTA) charge was abolished in April 2024. Previously, there was a £1,073,100 cap on the amount you could save into a pension without paying a tax charge, leading to high earners like doctors declining work and retiring early.

Now it’s gone, building a large pension has become more attractive. However, Labour has pledged to bring it back should they win the next election – and those in a position to benefit need to act fast.

Mr Hollands said: “Labour’s knee-jerk pledge to reinstate the LTA the day after the scrapping was announced has thrown a cat among the pigeons, especially as it has yet to confirm its policy or announce at what level the LTA would be resurrected.

“This has left a seed of doubt among some as to whether it is ‘safe’ to recommence pension funding given the prospect of a change of government later this year.

“However, it is important to understand that the LTA has been removed from the statute book, so a future government wishing to reintroduce it would have to pass new legislation. It’s unlikely a new LTA would be in place before April 2025.

“Taxing people or applying new limits retrospectively would be highly contentious, open to challenge – and therefore highly unlikely. There is also strong precedent that those impacted should be able to take out protection against LTA tax charges.“

“On top of this, a Labour government might even reintroduce it at a higher level.”

Mr Hollands said this presents an opportunity – and the time to act is now.

He added: “Making use of this window should be a high priority for those wishing to maximise their retirement fund.

“Firstly, those who have previously opted out of their workplace pensions due to concerns about breaching the LTA, or because they had taken out fixed protection to preserve a higher level of LTA, should speak to their HR or payroll department about opting back in.

“If you get large bonuses, it’s also worth considering using salary sacrifice to put these straight into your pension, as it comes with large tax savings.

“During the same Budget, the Chancellor also increased the amount you can put into a pension to the lower of £60,000 or your annual salary before you lose tax relief. If you used to contribute to a pension but stopped, you may be able to carry forward unused allowances from the previous three previous years once you have maximised your current year.

“This offers the chance to make a large contribution and still get tax relief.

“However, if your adjusted income, meaning income from all sources plus pension contributions and benefits in kind, is above £260,000, your allowance does reduce by £1 for every £2 you earn over that, so you’ll need to factor this in.”

Leave your lump sum unless you absolutely need it

With most pensions, you can take 25pc as a lump sum after you reach the age of 55 (this is due to rise to 57 in 2028). This is tax-free, and if you have a big fund it can be a substantial amount of money that’s tempting to take immediately.

However, there are serious drawbacks to doing this too early, particularly for a luxury purchase.

Mr Rayner said: “Everybody dreams about doing something truly special when they can finally access their pension pots after a lifetime of saving, whether it’s buying that fancy luxury car you’ve always had your eye on, or taking a luxurious trip.

“But taking a one-time trip like a luxury cruise around the world, which could cost in the region of £80,000 to £100,000, would significantly reduce your remaining funds and affect the compound growth potential of your pension pot.

“Even luxury assets can be a risky play. For example, a 55-year-old with a larger pot worth £800,000 could afford to buy a 2024 Ferrari Roma Spider, which starts at a retail price of £210,313, using their lump sum. While this might seem like an investment in a tangible asset, luxury cars like these can also depreciate rapidly.

“If that person hadn’t cashed out and instead waited until 65 [to access their pension], assuming they kept contributing £500 monthly and had 6pc growth, they’d have ended up with a pension worth £350,000 more and enough to buy an even better car or achieve other goals.

“While it might be your lifelong dream, a luxury purchase like that could substantially diminish your long-term financial stability, leaving you with reduced resources in retirement. Exploring your options with a financial adviser is always your best bet.”

Mr Rayner added that there were other beneficial ways to draw a lump sum, rather than all at once.

He said: “Savers should avoid withdrawing the tax-free lump sum in one go at 55 unless they absolutely need to. Those who take it will often harm the potential growth of their pot and leave themselves at risk of being left short of money in retirement.

“Most pension savers don’t actually realise just how much flexibility there is with the lump sum. It doesn’t need to be withdrawn immediately at 55 and the longer you leave it, the more it should be worth when you do take it.

“It can also be accessed in instalments, instead of all in one go. Depending on your individual requirements, you could use your pension to provide both an annual instalment of tax-free cash and a regular income, allowing you to minimise the tax you pay.

“For example, you could take 5pc when you retire and 1pc each year for 20 years. This would provide a steady income stream without severely depleting your pension reserves and enable you to pay less tax. A financial adviser can help you with this.”

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