Pensions are among the most important financial commitments you’ll ever make – but they can be complicated
Not understanding pensions and believing in some of the most prevalent myths could leave you short of the cash you need when retirement comes round.
At Continuum we are looking at some of the biggest pension myths – and how seeing the true facts behind the mystery could leave you much better off.
1. You’ll get a state pension to live on
This myth is partly true. You probably will get a state pension. This is the pension you get from the state (or government) and is based on your National Insurance contributions over your lifetime.
But can you live on it? The full state pension currently stands at £11,973 per year. That’s not enough for most people to survive on – and the growing numbers of retirees mean that the state pension in its present form is starting to look impossible for the Treasury to afford.
So, you may get a state pension when you retire. But you may have to wait for a state pension age which is going ever higher, and you can’t expect it to be enough to live on.
2. You’re better off putting your money in a savings account
This is a particularly dangerous myth. Pensions are one of the most tax efficient ways to save. That’s because you get tax relief on money you pay – the government pays into your pension pot when you do. If you’re a basic rate taxpayer, the tax relief means that every £100 you pay into your pension will only cost you £80. Higher rate taxpayers pay only £60 to put a £100 in their pot.
You can save alongside your pension. But you should not miss out on the power of a pension saving to boost your wealth.
3. Your workplace pension contributions are fixed
If you’re an eligible employee, you’ll be automatically enrolled into your workplace pension scheme. You’ll contribute 5% of your qualifying earnings, but this includes 1% tax relief from the government—so only 4% is actually deducted from your wages. Your employer must also contribute a minimum of 3%, bringing the total minimum contribution to 8%
But you can choose to pay in more, and some employers will match your contributions if you choose to up your contribution.
It all goes to potentially swell your pension pot. And why miss out on free money from your employer?
4. It isn’t worth saving into a pension when you are young
Of course, money is short when you start out, and there are plenty of other things to spend it on. But starting your pension early, even if you can only afford a small amount is very worthwhile. It’s all due to compound interest. The money you put in earns interest, and the interest starts to earn interest, and so on.
Time really is money – the sooner you invest, the longer compound interest has to potentially grow your money, and the larger your pension pot can potentially become. 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 build the pot you need.
Pensions involve investments and can go down as well as up – but the sooner you start, the better your chances of building a big pot can be.
5. You have to stop working to start taking your pension
There is a small grain of truth in this myth. The fact is, if you have a pension pot, you don’t necessarily need to stop working to start drawing money from it. This flexibility can be ideal if you’re looking to ease out of employment gradually—perhaps by reducing your working hours or days.
However, if you’re part of a Defined Benefit scheme— perhaps because you work in the public sector—you may be required to stop working in order to begin receiving your pension
Get some independent advice on your pension arrangements to see how you can use your pension pot.
6. You can’t retire early
A definite myth – although you can’t start getting your state pension until you reach state pension age.
However, you just have to be aged 55 or over to take money out of your personal or workplace pension, rising to 57 in April 2028. You might be able to take money from your pension before 55 if you’re retiring early because of ill-health.
You just need to have a large enough pension pot to provide the income you need.
7. You can sort everything out when you come to retire
The most dangerous myth of all. Your future depends on your pension – which depends on the size of the pension pot you amass. You need to make the right decisions now if you are to build up the kind of pension pot you want and building the pot will be easier if you start early.
So don’t fall for the myths. Get the clear view of your pension prospects that you need.
Call us at Continuum today.
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Workplace pension contributions: how much must be paid in | MoneyHelper
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.
The Financial Conduct Authority does not regulate taxation advice.
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.
The tax treatment of pensions in general and tax implications of pension withdrawals will be based on individual circumstances, tax legislation and regulation, which are subject to change in the future.
