Although pensions appear complex to many people, their essence is relatively straightforward. You contribute to a long-term savings plan, your money gets invested over the years, and you have a retirement fund to sustain your post-working years.
Despite the principle being the same across all pensions, not all schemes are the same. For instance, some pensions offer different benefits to others. Some have tantalisingly low charges, while other plans have ridiculously high fees.
These differences can make choosing a suitable pension challenging. The perceived complexity of pensions means that many people refrain from doing sufficient research.
In this situation, certain myths around pensions have developed. Unfortunately, these myths could be threatening your retirement funds. This article aims to debunk these myths to get your retirement savings back on track. If your financial future is important to you, it is highly recommended you engage with a financial advisor (such as Portafina) before making any decisions.
Myth 1. You should not take your pension before retirement.
This statement may appear reasonable, considering your pension aims to save for your retirement. Indeed, before 2015, you could not access your pension funds until you reached retirement age. However, in that year, the government introduced the Pension Freedoms legislation. It allowed people to access their pension funds from age 55 for specific pensions.
Of course, accessing your pension funds too early may not be the right option. Therefore, it may be prudent to consult a regulated financial advisor on this issue before making any decision that could affect your retirement income.
Myth 2. Pensions do not need to be managed.
As we mentioned above, the basic principle of pensions is straightforward. You can consider it a long-term savings plan that you access later in life.
However, some aspects of pensions can change, just as your circumstances can change. For instance, when you first take out a pension, you may be single. On retirement, you might have children or grandchildren to consider. That’s why it’s a good idea to seek financial assistance regarding your pension.
Most UK pensions achieve their growth through investment in the stock market. Here, your investments are likely to experience the most significant returns.
Of course, the stock market can rise as well as fall. Therefore, you must have a defined investment strategy and knowledge of stock trading to ensure you do not make any adverse decisions regarding your pension. If you do not have this knowledge, or the ability to strategize, a financial professional should manage your pension.
Myth 3. The State Pension is the same for everyone.
It may only be a small amount, but there are differences in the amount people will receive from the State Pension. What you receive depends upon how many National Insurance contributions you have made during your working life. Generally, these get taken from your monthly salary, with the amount you pay shown on your wage statement.
If you have been out of work due to illness, unemployment, or other reasons, you could have gaps in your National Insurance contributions. Also, if you are self-employed, if you don’t organise your National Insurance contributions, you could miss out on the full State Pension. To receive the full amount, you need to have made National Insurance contributions for 35 years, but these do not need to be consecutive.
Myth 4. When you die, your pension is worthless.
Having saved into your pension for so many years, it would be a shame if that money were last on your death. Another benefit introduced with the pension freedoms legislation is that it is now more straightforward to pass your pension pot onto a loved one in the event of your death.
Therefore, as well as having peace of mind that you are providing for your future, you are also safe knowing that your loved ones will be looked after. You should make your pension provider aware of who will receive your funds in the event of your death. Pension funds are not considered an inheritance, so there is not the same tax burden on the recipient as there is with other assets.
Myth 5. Your workplace pension will grow on its own.
For qualifying workers, employers must provide a workplace pension scheme. With the demise of final salary pensions, workplace schemes are becoming a crucial aspect of people’s retirement plans.
If you change jobs, you will also change pension schemes. Therefore, you stop contributing to your old pension. It is easy to lose track of previous workplace pension schemes. In fact, there is a £19.4 billion black hole of lost pensions in the UK1.
You don’t want your money to fall into this hole. Therefore, you should consult a regular financial advisor to discuss your options for transferring or combining old schemes.
Conclusion
Pensions may be straightforward, but many people find them complex or don’t want to deal with them. The myths surrounding pensions make matters worse. Hopefully, this brief article has debunked five of these pension myths to help you maximise your pension funds and achieve a comfortable retirement.
1The Association of British Insurers (2020).
