Along with mortgages, pensions are the most important financial arrangements most of us ever make. Yet millions of us don’t really understand how they work or put off thinking about them when times are hard, and money is tight.
Pensions are simply savings we make while we work to provide an income when we stop. But despite this simplicity, there are many myths about them that mean some people fail to make the right decisions.
At Continuum we are looking at those myths.
1. The state will provide all the pension I need
This is a dangerous myth, because it has a grain of truth. Almost everyone will receive a state pension, once they reach state pension age. But not only is state pension age being steadily increased, the state pension provision is less than generous. It currently stands at £221.20 a week or £11,502.40 a year – not enough for a comfortable living.
2. You’re better off putting the money in a savings account
Savings are great – but pensions can be better thanks to tax relief. As a basic rate taxpayer, to put a pound in your pension costs 80p – the taxman adds the rest. He is even more generous if you are a higher rate payer, and that pound costs you just 60p. This plus the profits of investing those contributions means your pension may be the best investment you ever have.
3. Your money is tied up until you are too old to enjoy it
There’s some confusion about when you can get your hands on your pension. You can draw a private pension much earlier than the state pension after you turn 55 (or 57 from 2028). What’s more, you can take 25% of the pension tax-free at this point.
4. Pension saving isn’t worth it when you are young
There are plenty of demands on your money when you are young. But the longer it is in your pension, the more it has potential to grow, thanks to the wonders of compound interest. You earn interest each year. Compounding means you earn interest on your interest in future years.
If you don’t start saving when you are young, you will need to pay a lot more a month when you are older to catch up with compound interest.
5. Your workplace pension is enough
If you are over 22 and earning more than £10,000 a year, you automatically join your workplace pension. Your employer must pay a minimum of 3% of your salary into your pension and you have to pay around 5%. Then the government tops this up with tax relief (If you’re under the age of 22, you won’t be automatically enrolled into your employer’s workplace pension scheme, however, if you earn £6,240 or more a year (tax year 2024/25), you have the right to opt in to the scheme.)
This is effectively a pay rise (although you don’t get to spend it yet) and too good to miss out on. You might want to maximise the money you put in, especially if your employer will match it. But few of us are in a job for life anymore. It makes sense to have a private pension that runs alongside any workplace pension.
6. You have to work to have a pension
You need to have money coming in to put into a pension, but you don’t need to be in work. In fact, you don’t even need to be 18. You can start a pension at any age, working or not. Some families even set up pensions for their children, knowing that the returns (thanks to the compound interest goldmine) make even small regular contributions add up over the years.
7. Only you can pay into your pension
You can pay into someone else’s pension for them, depending on the type of pension they have. Some people choose to pay into a pension for a spouse or partner that isn’t working, or for a child or grandchild. It could mean more tax relief, and more money stashed away.
8. You have to stop working to collect your pension
You can take money out of most pensions from the age of 55 (currently – it is going up to 57 in 2028) even if you are still working. Want to taper off your working time, or dip into your pension funds? You can – but be careful. If you take more than your 25% tax-free lump sum you will pay tax on it.
9. You have to stop paying into pensions when you retire
You can put money into a pension even if you’ve started to take money out. However, there are limits to be aware of.
If you’ve taken money out of your pension as a lump sum or as income payments, you may trigger the MPAA (money purchase annual allowance). This limits the amount that can be paid into your pension to £10,000 a year currently.
10. You can never take your pension early
If you are retiring early because of ill-health, then you might be able to take money from your pension before you’re 55 or if you are under 75 years old.
11. You don’t need any help with your pension
You can set up a workplace and even a private pension yourself. But it makes sense to get expert help. Understanding the regulations, knowing how to make your contributions work harder and the best providers for your needs could all make a big difference to your income after you retire.
Getting the help, you need is simple. Call us at Continuum.
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The information contained in this article is based on the opinion of Continuum and does not constitute financial advice or a recommendation to suitable investment or retirement strategy, you should seek independent financial advice before embarking on any course of action.
A pension is a long-term investment; the fund value can go down as well as up and this can impact the level of pension benefits available. Pension Income could also be affected by interest rates at the time benefits are taken.
Pension savings are at risk of being eroded by inflation.
Accessing pension benefits early is not suitable for everyone. You should seek advice to understand your options at retirement.
Accessing pension benefits early may impact on levels of retirement income and your entitlement to certain means tested benefits.
Levels, bases and reliefs from taxation are subject to individual circumstances and may be subject to change.
The Financial Conduct Authority does not regulate taxation advice.
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