Pension Myths Dispelled

Because the pensions rules and terminology can be complicated and confusing, it’s often an area that’s avoided and sometimes neglected entirely. Here, we have addressed some of the most common myths we come across:  

·         It’s not worth saving into a pension

Pensions can be a hugely effective way of saving for retirement. If you are saving into a workplace pension, most employers are required to match some of your contributions. You should benefit from tax relief on the money you put in with the amount depending on your tax rate, 20%, 40% or 45%. For example, someone in a group company scheme and paying basic rate tax could pay in £80 per month, receive tax relief of £20 and an employer contribution of £60, effectively doubling their own contribution.

Saving into a pension can be started at any point and even those who pay no income tax can benefit from tax relief on contributions up to £3,600 per annum.

Once contributions to your pension scheme are invested, they grow largely free of taxes. The compounding effect of investment growth can mean over time, you can end up with far more than you put in.

Then, when you’re eligible to start taking money out of your pension – usually from age 55 – up to 25% of its final value can be taken out as tax free lump sum.

·         I’ll have to buy an annuity once I retire

It used to be the case that when you retired, most people had no choice but to convert it into an income for life, using an annuity. This has now changed and, if you have a Defined Contribution scheme (where you build up an invested “pot”), you have a lot more freedom over how to take benefits.

·         My pension will die with me

What happens to your pension when you die depends on the type of scheme you have. With Defined Contribution pensions, any money left in your pot when you die can be passed to your beneficiaries, usually free of inheritance tax. Your beneficiaries’ withdrawals are normally tax free if you die before the age of 75 or taxed as income if you die after turning 75.

If you have a Final Salary/Defined Benefit pension scheme, the rules are different. Your spouse or financial dependents may be entitled to a survivor’s pension and lump sum dependent on the scheme rules.

·         Pensions are complicated, expensive and hard to manage

If you have lots of different pensions, think about whether consolidating them into a single plan might make your retirement savings easier to manage. Having everything in one place can ensure you have a good idea of what you have and if you are on track to achieving your retirement saving goals.

You will need to make sure you are not giving up any valuable benefits if you decide to transfer your pension – a Financial Planner can let you know whether you would be better off staying put.

·         I don’t need a pension. The state will provide for me when I retire

For the 2021-2022 tax year, the new State Pension is a maximum of £179.60 a week, but only those who meet certain criteria are eligible for the full sum. By 2028, the age at which you’ll be able to claim it is likely to be 67. At £9,340 a year, for most, this isn’t enough to even cover the essentials.

·         Pensions can’t be trusted, I might lose my money

Generally speaking, the risk comes from the underlying investments, not the pension itself. While risk is a part of investing and cannot be avoided entirely, it can be reduced by ensuring you are well diversified and by not “having all of your eggs in one basket”. It is essential you ensure your pension is appropriate for your needs.

·         I lost track of my pension years ago, it’ll be impossible to find!

According to the Department for Work and Pensions, an average person can have 11 jobs in their lifetime, so it’s easy to see how various pension pots can often get lost along the way. You might be surprised as to how the small amounts can add up, so the sooner you trace a lost pension, the better. You can start by contacting your previous employer. If you don’t have any contact details for them, the Government’s free pension tracing service may be able to help: https://www.gov.uk/find-pension-contact-details

Getting to grips with understanding your pension can have a substantial impact on what your lifestyle might look like in retirement. It’s never too early to plan to maximize the benefits you’ll receive when you finally retire, but it can be too late to make a real difference.

Don’t hesitate to contact us if you would like to discuss your retirement planning requirements.