Millions of people could be missing out on pension cash or paying more tax than necessary due to common misunderstandings about how retirement savings work. Helen Morrissey, head of retirement analysis at Hargreaves Lansdown, said the start of the new tax year is the ideal time to take stock.
She said: “People often have lots of questions about their pensions, and taking the time to understand how they work can make a big difference to your retirement income.”
Ms Morrissey has shared five key areas to look at to ensure you are maximising your income for later life and not missing out on opportunities to boost your retirement savings pot.
Lost pensions could be worth thousands
Many workers build up multiple pension pots as they move jobs and it’s easy to lose track of them over time. Ms Morrissey said: “If you think you’ve lost an old pension, the Government’s tracing service can help you track it down. You could find a pension worth thousands of pounds.” The service won’t confirm whether you have a pension, but it can provide contact details for schemes linked to previous employers. Once found, some people may consider combining pots, but this should be done carefully, as valuable benefits or guarantees could be lost. Full details on the Pension Tracing Service can be found on GOV.UK.
You may be missing out on tax relief
Tax relief is one of the biggest perks of pension saving, but many people don’t realise they may not be getting the full benefit. Ms Morrissey said: “Tax relief is a great incentive to contribute to your pension, but depending on how your contributions are made, you may need to claim some of it yourself.” For example, a £100 pension contribution could cost a basic-rate taxpayer £80, while higher-rate taxpayers may only pay £60 after claiming additional relief. Those in “relief at source” schemes may need to claim extra tax relief directly from HM Revenue and Customs (HMRC) and claims can be backdated for up to four years.
Pension income can trigger a tax bill
While up to 25 per cent of a pension can usually be taken tax-free, anything above the £12,570 Personal Allowance may be taxed. Ms Morrissey warned this can catch people out: “Even drawing a small pension income on top of your State Pension can tip you into paying tax.” The State Pension currently sits just below the tax-free threshold, but this is expected to change. From April 2027, the full New State Pension alone could exceed the Personal Allowance, potentially pulling more pensioners into the tax system. However, it’s important to note the UK Government is taking steps to ensure anyone whose sole income is the State Pension will not pay tax.
Inheritance rules are changing
Pensions can often be passed on to loved ones, but the rules depend on the type of scheme and whether forms are up to date. Ms Morrissey explained: “If you have a defined contribution pension, you have flexibility over who inherits it, but you need to make sure your expression of wish form is completed and kept up to date.” Currently, pensions are usually outside a person’s estate for inheritance tax purposes. However, from April 2027, they are expected to be included, which could create unexpected tax bills for families.
Retirement needs vary more than people expect
There is no one-size-fits-all answer to how much you need in retirement, with lifestyle choices playing a major role. Ms Morrissey said: “It depends on what kind of retirement you want. Taking time to think about your plans can help you understand how much you’ll need and whether you’re on track.” The retirement expert suggests using pension calculators to estimate future income and identify any shortfall early. With several rule changes on the horizon and tax rules becoming more complex, reviewing your pension now could help avoid costly mistakes and make a significant difference to your income in later life.
