Pension & retirement
Harry Sims
Building a pension can take 30 or 40 years. It is surprisingly easy to undo some of that good work in an afternoon.
After more than a decade helping people plan for retirement, I tend to see the same mistakes cropping up.
Some are technical. Others are behavioural.
And quite a few look completely harmless until you discover the tax bill or valuable benefit hiding underneath.
So what are the five biggest pension traps I regularly come across when people are planning for retirement?
One thing comes up time and time again when I talk to people about their retirement.
They look at their current salary and assume they need to replace it and they usually don’t.
If you’re earning £100,000 today, that doesn’t necessarily mean you need £100,000 a year in retirement.
On a £100,000 gross salary in the UK (for the 2026/27 tax year) with a 5% pension contribution (£5,000), your annual take-home pay is approximately £64,807 (about £5,400 per month).
When you switch to pension income it isn’t subject to National Insurance, although taxable pension withdrawals may still be subject to Income Tax but, NI is a big tax that many don’t consider.
You are also no longer making pension contributions and, depending on your circumstances, the mortgage may have been repaid.
Your salary and the amount you actually live on are two very different numbers.
Retirement income can also often come from several places. Pensions, ISAs, cash and other investments can all play a part.
I’ve seen situations where careful use of pensions, tax-free cash, ISAs and other savings has meant the overall tax paid on retirement withdrawals was surprisingly low.
Not because of some clever tax avoidance scheme, but because income was taken from the right places at the right time, in the right order.
I often ask clients a very simple question: if there was a cash machine in your life, how much would it need to print every month for you to feel financially free?
Ignore tax for a moment. What actually needs to land in your bank account?
Once we know that figure, we can work backwards and look at how it might be produced.
Because every pound unnecessarily lost to tax is a pound that cannot be spent enjoying retirement, gifted to your family or left invested for later.
Lesson 1: Don’t start with your gross salary. Start with how much you actually need to land in your bank account each month. They are two very different numbers. Retirement may be be closer than you think, since you base it on your current gross earnings.
New clients often come to me assuming retirement starts when their State Pension starts. But those are two very different things.
The State Pension provides a valuable foundation to someone’s retirement income.
But if you have built pensions, savings and investments alongside it, you may have options long before State Pension age.
And this is where I think people can make quite a sad mistake.
They spend decades building wealth but never quite give themselves permission to use it. If you want to stop working at 60, travel more, spend time with your grandchildren or simply stop setting the alarm clock every morning, why automatically wait?
Quite often, the barrier isn’t money, it is confidence.
People don’t know whether they can afford to stop, so the default becomes carrying on working. This is where cashflow planning can be incredibly powerful.
We can model, for example, someone taking £6,000 a month from age 60 and then reducing withdrawals later when State Pension income begins. We can look at different retirement dates, spending levels, market falls and life expectancies.
Suddenly retirement stops being a guess, it becomes a plan.
For me, that is one of the most valuable parts of financial planning. In retirement, peace of mind and clarity becomes a currency in its own right.
Nobody wants to reach 85 with a huge pension pot and realise they could have retired five years earlier.
That being said, work gives us much more than a salary. For many people it provides purpose, routine and friendships too. Retirement is never one size fits all.
But neither should your retirement date automatically be dictated by when the State Pension happens to arrive.
Lesson 2: Clarity is often the key that unlocks financial independence. Don’t automatically assume State Pension age is your retirement age.
People love tidying things up and with consolidation, three pensions become one pension.
One login. One statement. And quite often, consolidation does make sense.
But doing it purely for administrative convenience can be an extremely expensive tidy-up.
I once came across a client with an old pension containing a guaranteed annuity rate of around 10%.
In simple terms, a £100,000 pension could potentially provide roughly £10,000 a year of guaranteed income for life under the terms of that particular guarantee.
Finding an old pension capable of producing that level of guaranteed income can look almost suspiciously generous by modern standards. But valuable guarantees can still be buried inside old pension contracts.
Other plans may contain protected tax-free cash (above 25%) or other benefits that could potentially be lost if the pension is transferred.
It is important to note that, at current rates, the standard tax-free lump sum allowance is £268,275, with higher amounts possible for people with certain protections.
That is why you need to understand what is under the bonnet before deciding an old pension should be consolidated.
A pension statement might look dull enough to cure insomnia, but occasionally there is something extremely valuable hiding in the small print.
That’s why before transferring an old pension, you should check for the following:
Lesson 3: Don’t consolidate simply because it looks tidier. Understand exactly what you may be giving up before transferring an old pension
Another common misconception is that retirement means everything suddenly needs to become “safe”.
You retire on Friday, by Monday morning, apparently the entire investment strategy needs changing.
If you retire at 60, you could have another 30 years ahead of you. That is nearly as long as many people spent building their pension in the first place.
Retirement isn’t a single event. It could be a three-decade investment journey. That doesn’t mean taking unnecessary risk, far from it.
It means understanding all the risks, people naturally worry about their pension falling during a market correction and that is understandable.
But there is another risk at the opposite end of the spectrum: becoming too cautious, not achieving enough growth and gradually watching inflation and withdrawals eat away at your spending power.
The more important question is how much short-term volatility you can financially and emotionally tolerate, this is why some clients like to have what I call an “ammunition fund”.
For some people, that might mean keeping one or two years of expected withdrawals in cash or lower-risk assets.
If markets fall, they aren’t automatically forced to sell investments at exactly the wrong moment.
Cashflow planning can then look at both sides of the equation: what happens if markets fall sharply, but also what happens if the portfolio grows too slowly over a retirement that could last 30 years.
Most people spend far more time worrying about the first risk than the second.
Lesson 4: Retirement doesn’t mean investment risk disappears. Understand the risk of markets falling, but also the risk of becoming too cautious for a retirement that could last decades.
I sometimes say to clients: don’t let Donald Trump be in charge of your retirement, or the Prime Minister, or the Chancellor.
Markets will always give you a reason to worry. Clients understandably want to sell before the market falls, buy back at the bottom and neatly sidestep all the difficult bits.
There is just one small problem: you have to be right twice. You need to know when to get out and, crucially, when to get back in.
If you can consistently do that, you don’t need a financial adviser. You need the DeLorean from Back to the Future.
Good retirement planning should instead accept that difficult markets will happen.
The question shouldn’t be: “How do we make sure markets never fall?”
It should be: “What have we put in place so that when they do, I don’t have to panic?”
That may mean holding an ammunition fund. It might mean understanding how much of your essential expenditure is already covered by guaranteed income such as the State Pension or a defined benefit pension.
If your normal expenditure is covered, it becomes much easier to ride out the waves.
This is also where having a financial plan really earns its keep. Clarity is the goal, not trying to predict.
When markets fall, you aren’t making decisions from scratch while surrounded by alarming headlines. You can go back to the assumptions you made when everybody was calmer.
In our planning, we stress-test retirement plans against some horrible periods for investors, including the dot-com crash and the global financial crisis.
They aren’t particularly pleasant scenarios to look at. But that’s the point.
I’d rather discuss the storm while the sun is shining. Then, if markets fall and somebody starts worrying, we can go back to the plan and say: we planned for this.
Sometimes financial planning is spreadsheets and tax allowances. Sometimes it is a good dose of market therapy.
Lesson 5: Don’t let emotions take control of your retirement plan. They have a habit of becoming very expensive.
Expert advice from a professional financial adviser can help you avoid these common pension traps – and quite a few more besides.
Fairstone has expert advisers across everything from how to plan your retirement to passing on wealth to the next generation.
With offices across the UK and Ireland, we combine local knowledge with national scale and global investment options.
Find an adviser near you to start planning confidently for your retirement today.
Disclaimer: This article is for informational purposes only and does not constitute financial, tax, or legal advice. Tax treatment depends on individual circumstances and may change. The value of investments can go down as well as up and you may not get back the full amount you invested. Past performance is also not a reliable indicator of future performance. Always seek professional advice before making financial decisions.
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The biggest pension traps include assuming you need to replace your gross salary in retirement, automatically waiting until State Pension age to consider retirement, consolidating pensions without checking their benefits, becoming too cautious with investments and allowing emotions to drive investment decisions.
The amount you need depends on your lifestyle, housing costs, debts, tax position and other sources of income. Rather than simply trying to replace your salary, it can be more useful to calculate how much you actually need to spend each month and then work out how pensions, savings, investments and the State Pension could provide it.
No. You can choose to retire before State Pension age if your financial circumstances allow it. Your private or workplace pensions and other assets can potentially provide income before your State Pension begins. Cashflow planning can help you assess whether retiring earlier is sustainable.
Not necessarily. Consolidating pensions can make them easier to manage and may have other advantages, but transferring an old pension could mean giving up valuable guarantees or protections. You should check the benefits and terms of each pension before transferring it.
Yes. Some older pension schemes can contain valuable benefits such as guaranteed annuity rates, protected tax-free cash or a protected pension age. These benefits may be lost when a pension is transferred, so it is important to understand what you have before consolidating pensions.
A guaranteed annuity rate is a feature of some older pension policies that can provide an annuity at a predetermined rate, potentially producing a significantly higher income than rates available on the open market. Because these guarantees can be valuable, transferring a pension that contains one should be considered carefully.
Retirement does not necessarily mean you should move your pension entirely into cash. If retirement lasts 20 or 30 years, your investments may still need to grow to keep pace with inflation and withdrawals. The appropriate level of investment risk depends on your circumstances, income needs, time horizon and ability to tolerate market falls.
Sequence of returns risk is the risk that poor investment returns early in retirement, combined with withdrawals, can have a significant impact on how long your pension savings last. This is one reason why retirement planning needs to consider not just average investment returns but also the timing of market falls.
Cashflow planning uses assumptions about income, spending, investments, inflation, tax and life expectancy to model how your finances could develop over time. It can help you assess different retirement dates and spending levels and test how your plan might cope with events such as market falls.
Having a clear financial plan can help you avoid making decisions based on short-term market movements or alarming headlines. Building appropriate cash reserves, understanding your investment strategy and stress-testing your plan can give you greater confidence when markets fall.
Yes. Taking too little investment risk can reduce the potential for your pension and other investments to grow over a long retirement. While protecting your income from market falls is important, being overly cautious can also expose you to inflation and the risk of your money not lasting as long as you need it to.
You need to consider your expected spending, guaranteed income, pensions, savings, investments, tax position and how long your money may need to last. A cashflow plan can model different retirement dates, spending levels, investment returns and market conditions to help determine whether your retirement plans are sustainable.
For further information, please contact:
Pension & retirement
Pension & retirement
Pension & retirement
Pension & retirement
Pension & retirement
Pension & retirement
For further information, please contact: