Diving into the world of pensions can be pretty awe-inspiring at any age. Fundamentally, it all seems to make sense – you put money in, the money gets invested, you receive a nice little package when you say goodbye to the boss.
However, not all pensions or investments are the same and when you factor in benchmarks, future profits, the myriad of options and benefits to choose from and the unfathomable behaviour of the financial markets, it can all get too confusing. Where facts are sparse and understanding is basic, we often tend to refrain from finding out more – this is how bewildering myths arise.
In this article we are going to look at some of the most prevalent and destructive myths that have built up over the years, and then reveal the truth.
“Taking your pension before you retire is a definite no-no.”
On first glance this makes absolute sense. After all, the pension fund you have built up was intended to make you secure and offer you lots of options when you retired from work. Taking money from this pot early may alter the amount of money you have available when you most need it. That point aside – are you allowed to withdraw money early anyway?
Up until 2015 your options were pretty limited when it came to withdrawing pension money early. Then, in 2015, the law changed. The government introduced the Pension Freedoms, which allow individuals with an eligible scheme to take money from their pension how and when they choose from the age of 55.
But there could be a lot of obstacles along the way. Because of issues with tax, the fact that all pensions should be analysed carefully, and because we all have unique financial needs in our later years, it is important that you seek out the guidance of a regulated financial adviser.
A financial specialist, such as Portafina, can help you factor in the pension freedoms as an extra option when it comes to your financial planning and retirement strategy. It can help you pay off burdensome debts and maybe give yourself a treat while still keeping your retirement years safe and secure.
Taking pension money early is not right for everyone, though. That’s why it is so important to get advice from a regulated specialist before making any final and lasting decisions.
“Pensions are like a bank account; I don’t need help managing them.”
The idea behind pensions is very simple. Save money in an environment where it has every opportunity to grow so that your pot is as big as possible when you retire. Then, you withdraw the money as and when you need it. And yet there are so many moving parts to a pension, let alone taking into account your changing plans as you journey through life. This is why specialist financial help can be invaluable.
Most UK pensions are invested in stock markets because this is where you are most likely to get the best returns. And yet, stock markets are notoriously fickle and complicated. They go up and down in value all the time. So, without a clear investment strategy, and in-depth trading knowledge, there is a danger of making irreversible decisions that could seriously harm the long-term prospects of your pension.
Then there is the question of managing your investments in line with your attitude to investment risk as you approach and enter retirement. All these elements to factor-in make pensions a lot trickier to manage than a bank account.
“Everyone receives the same State Pension.”
More or less. But it is the less which can creep up and shock people at the wrong time. The fact is the amount of State Pension you receive is dependant upon the amount of National Insurance contributions you make while you are working. A set amount is taken from your income at source before you receive your salary.
However, if you are out of work for any amount of time, or for some reason your contributions are not paid (if you are self-employed you will need to manually make sure contributions are paid), you may not receive the maximum amount of State Pension.
It is likely that your State Pension will be smaller than your private or occupational pension – but that does not make it less important. Many find it is essential for providing the fundamental retirement needs. So, keep a track of it.
“When I die my pension has no value.”
After saving your hard-earned cash throughout your life, it would seem a pity if that money were lost should you not reach, or fully experience retirement. Again, since the introduction of the Pension Freedoms in 2015, it is simpler to make sure that your pension pot is passed on to your loved ones should you die before it has been used.
This way you can be safe in the thought that as well as giving yourself an income in your later years you could also be providing for your family or closest friends.
You need to make your pension provider aware of who you want the money to go to should the worst come to the worst. Also, this money is not treated as inheritance in the usual way and so will not attract the heavy burden of taxation.
“I can forget my old workplace pension and just let it grow.”
As long as you meet certain criteria, employers are legally obliged to offer you a workplace pension. This is helping more and more people to save for retirement, especially as the employer must contribute to the pension, too. It does mean, though, that every time you start a new job you will have another workplace pension to manage. And this means it’s easy to forget about your old workplace pensions.
The money you have saved into old workplaces schemes is still yours. But if you lose track of it, your money could become part of the £19.4 billion pension blackhole that exists in the UK1. And there’s a good chance there is a better home out there for the money you have saved in your old workplace schemes. So, every time you start a new job it makes sense to have a chat with a regulated financial adviser, to see if you could be better off transferring these savings to a new pension.
As much as preparing for your future is essential, not everyone finds the world of pensions a walk in the park. There are many websites such as the Pensions Advisory Service or Which Pensions which offer excellent guidance. Also, one of our regulated pension advisers can walk you through your options and guide you on a good route forward – just give us a call.
1The Association of British Insurers: as of 2020