FIVE PENSION MYTHS THAT CAN HARM YOUR RETIREMENT
Pensions are essential to your financial future, with precious tax relief on contributions, especially for higher rate or additional rate taxpayers.
But many people are still not putting aside enough for their retirement to pay for the standard of living they want when they stop working.
Several barriers exist to people saving enough for retirement, including misconceptions about pensions. Here are five myths that can prevent people from putting aside enough money for a happy retirement.
My property is my pension
Relying on downsizing the family home to provide a lump sum in retirement might be tempting. But nobody knows what house prices will do and how buoyant the market will be when you want to retire.
There are also costs associated with moving, such as stamp duty, legal fees, and the moving day itself.
If you have a buy-to-let property, you might be planning to live off the income from rent. But remember maintenance and repair costs you’ll need to do regularly, periods in between tenants where the property is empty, and that you’ll need to pay tax on that income.
Property can be a solid source of income, but pinning your standard of living in retirement on the performance of one asset class may not provide you with the financial security you desire. With your pension investments, you can ensure your portfolio is well diversified.
Only full-time workers can pay into a pension
Part-time workers have the same rights to join their employer’s workplace pension scheme or to be automatically enrolled.
Like everyone else, part-time workers must abide by the pensions annual allowance. You can contribute up to £60,0001 or up to 100% of your earnings which ever one is lower.
If you take a career break, you can still contribute to a private pension plan. Those with no earned income can save up to £3,600 per tax year, but this will only cost £2,880 because tax relief at the basic rate is automatically added to pension savings.
Keeping pension savings going, even at a modest level, can significantly affect eventual retirement income.
I can only take my pension when I stop working completely
You can start claiming your state pension regardless of whether you work. The current state pension ageis 66; however, it is set to increase to 67 by 2028. If you don’t need the money, you can defer it and receive a higher amount later.
Your payment increases by the equivalent of 1% for every nine weeks you defer. This works out as just under 5.8% every 52 weeks.2
You can withdraw money from your personal or workplace pension plan from age 55 while continuing to work (or from age 57 in 2028).
You can usually withdraw 25% of your money tax-free – if your pension pot is valued at £100,000, that’s £25,000 tax- free.
Anything above your tax-free cash is taxable. A reduced annual allowance could apply if you take a taxableincome but want to keep contributing – perhaps to keep getting your employer’s contributions. It might trigger the Money Purchase Annual Allowance, which is £10,000 per tax year.3
Final salary pensions have rules on the age at which you can start withdrawing. Some allow you to begin withdrawing if you take partial retirement.
I’m too old to start a pension
While the earliest investments can be the most valuable, thanks to the magic of compounding (where your money snowballs by earning returns on returns), it can be very valuable to keep saving in a pension. And there is still time if you’re just starting to plough money into your retirement in your late forties or even fifties, as the generous tax breaks are still worth having, particularly if you’re a higher rate or additional rate taxpayer. This is because you can receive tax relief at this rate and likely pay income tax on your withdrawals at a much lower rate.
My pension will die with me
But suppose you’ve left your pension untouched. If you’re in drawdown or you’ve made lump sum withdrawals, your pension can be left to any beneficiary (or number of beneficiaries) that you choose, normally free of inheritance tax.
If you die before age 75, there is no income tax. If you are 75 or over when you die, a beneficiary of your pension pot will have to pay income tax on any withdrawals at their marginal rate.
² https://www.gov.uk/deferring-state-pension/what-you-get
³ https://www.gov.uk/tax-on-your-private-pension/annual-allowance
