10 Pension Myths Debunked

10 Pension Myths Debunked

Your pension is probably the most important investment you have and, as you approach retirement, you need to know it’s going to finance your plans. With so much advice around – and much of it conflicting – it’s crucial to keep abreast of the latest developments. To bring you up to date and help separate fact from fiction, we asked some of the industry’s top experts to debunk the pension myths.

MYTH: It’s perfectly possible to live off a state pension
FACT: The new state pension pays £175.20 per week, or £9,110.40 per annum – so it’s up to you to decide if that’s enough to live on, although it’s unlikely anyone will think so. “This is unlikely to provide for even a very modest standard of living for a single person,” agree the experts at financial advice firm Brewin Dolphin. “And depending on your working history, you may find you don’t even qualify for the full amount.” Unsure? You can check your state pension entitlement here.
MYTH: Some people are too old to start saving
FACT: According to the Department for Work & Pensions, it’s better to start early, but unless your retirement is a few months away, there’s still time for you to build up some money. “Your contribution to your workplace pension will be a percentage of your salary,” explain the DWP. “You’re also likely to benefit from a contribution from your employer and may get tax relief from the government too. Tax relief means some of your money that would have gone to the government as income tax goes into your workplace pension instead.”
MYTH: If you have a workplace pension, there’s no need to worry
FACT: Just like a state pension, a standard workplace pension won’t offer that much security later in life. “For most people, simply enrolling in your company pension scheme will not be enough to create a comfortable nest egg,” agree the Brewin Dolphin team. “It is quite possible that someone could have to save for more than 40 years in work just to fund 30 years in retirement. With that in mind, the amount required by a basic workplace pension may well not be enough.”
MYTH: Pensions are really difficult to manage
FACT: Managing your pensions can be hard when you have small pots spread across different providers, admit the team at investment firm Hargreaves Lansdown, especially when you consider the average British worker has 11 different jobs over their working life. “It makes it hard to keep track of all the pension schemes they may have joined over the years, but by transferring all of their pensions to one provider, investors can take control of their retirement fund with one simple statement or website instead of piles of paperwork from different providers,” they add.
MYTH: It’s impossible to know how much to contribute 
FACT: True, it can be hard to work out how much to contribute to a pension or what level of income a pension pot will pay at retirement. But, say the HL team, it’s worth bearing in mind that more than a third of retirees say they wish they had saved more sooner. “Often, it’s not that people don’t want to save, it’s that they don’t know how much to put away each month. One rule of thumb when it comes to pension contributions is to divide your age when you start paying into a pension by two and contribute that as a percentage of your earnings. So, a 30-year-old starting a pension might need to pay in 15% of their earnings to get the pension they want, whereas a 50-year-old might have to pay in 25%.”

The new state pension pays £175.20 per week, or £9,110.40 per annum – so it’s up to you to decide if that’s enough to live on, although it’s unlikely anyone will think so.

MYTH: There’s nothing you can do to improve the performance of your pension
FACT: It’s true that disappointing pension performance can leave many thinking ‘why should I bother?’ But, say the HL team, it’s important to know where a pension is invested because all investments are different and where you are invested could have a significant impact on a pension pot. “More than a million people have chosen a SIPP (Self Invested Personal Pension) to fund their retirement. This is largely because of the wide investment choice and the control it gives them over their investments.” Doing this can give you greater control.
MYTH: You have to hand your pension over when you retire
FACT: Not so – retirement rules have changed say the HL team. “If you are at least 55 (57 from 2028), you now have a lot more freedom over how to draw your private pensions,” they explain. “You can take lump sums (single or periodical), income (secure or flexible) or a combination to suit your circumstances. It’s even possible to take your whole pension fund as cash in one go. Up to 25% of your fund is usually tax free, and the rest will be taxed as income.” Just be aware that tax rules can change, and any benefits will depend on your personal circumstances.
MYTH: Pension rules are only getting worse
FACT: There’s no denying there’s been a lot of change to pension rules in recent years, agree the HL team. But while it can be a challenge to keep up, pensions are actually more attractive and flexible than ever before – not to mention they’re still one of the most tax-efficient ways to save for retirement. “The key principle behind saving for a pension is simple: the more tax you pay, the more tax relief you can receive,” explain the HL experts. “Under current rules, a £10,000 investment for your retirement could cost you as little as £5,500, depending on your circumstances. No other investment grants the same benefits.”
MYTH: Your house can be your pension pot
FACT: “Property doesn’t allow you to spread your money across a range of different investments like a pension does, and doesn’t have the same tax advantages,” warns the DWP, so it’s not the most efficient way to grow or manage a pension. Plus, prices will move with the market, and the capital isn’t easily accessible should you need to draw some of it down.
MYTH: Your pension always dies with you
FACT: Contrary to popular belief, this isn’t always the case. “A defined benefit or final salary pension scheme may be limited to paying an income to your dependent,” explain the team at Brewin Dolphin. “However, most other pensions enable you to leave your pot to a beneficiary, and they don’t have to be your partner. Make sure that your provider knows who you would like to leave your pension to by completing a so-called expression of wishes form.” Plus, it’s worth knowing that if you die before you’re 75, pension benefits can usually be passed on tax free. Just remember that if you take your tax-free lump sum but do not use it before you die, it becomes part of your estate, and your beneficiaries will have to pay inheritance tax on it.
Visit HL.co.uk, Brewin.co.uk and Gov.uk for more information and advice regarding your pension.
*DISCLAIMER: Anything written by SheerLuxe is not intended to constitute financial advice. The views expressed in this article reflect the opinions of the individuals, not the company. Always consult with an independent financial advisor or expert before making an investment or personal finance decisions.

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