Fact or fiction? 5 pension myths busted!
Pensions are complicated.
Would you say this statement is fact or fiction?
We say fact. And here’s another fact for you.
There are a lot of myths out there that can cause unnecessary confusion around pensions. And the more confusion there is, the harder it is to make informed sensible decisions.
That’s not a good place to be when it comes to the most powerful savings tool most of us will ever have.
The good news is though, it’s just as easy to debunk these myths as it is to create them. By taking a couple of minutes now to get to grips with some of the basic pension facts, you can get back in the driver’s seat.
And that means you’re in control of your financial future.
So, let’s sort the facts from fiction and get myth busting!
Myth vs fact
“All pensions are the same”
Fact: This is far from the truth and thinking this way could be potentially damaging to your future comfort and security.
There are some amazing pensions out there and ones that are simply terrible. And, if you’re in one that charges the earth in management and service fees, there is a strong possibility that you could see your pension drop in value.
This is what happened to a newsagent from Edinburgh. He paid into his pension for several years and when he decided to check it, he found that instead of increasing in value, he had lost nearly 75% of his fund due to charges.
“My pension dies with me”
Fact: If you die before the age of 75, typically your personal pension fund can be paid as a lump sum to any beneficiary/beneficiaries of your choice. And above all, it’s tax-free.
If you die after 75, your personal pension can still be paid to your beneficiary as a lump sum, but at the beneficiary’s marginal rate of income tax.
Death benefits vary from scheme to scheme, so it’s always best to check which death benefits are included in your pension, especially when it comes to final salary pension schemes.
“It’s too late to make a difference”
Fact: Leaving your pension where it is and doing nothing with it, can be the biggest risk you take.
Pensions vary wildly and if you’re in a really bad one, there’s no need to panic. There should be plenty of time to say goodbye to the restraints that a poorly performing pension brings and hello to a multitude of opportunities that a good one could offer.
“I shouldn’t touch my pension before I stop work and retire”
Fact: It really depends on your circumstances. And since 2015, the one thing you do have from the age of 55 is a lot more options than before when it comes to your pension.
Maybe you are thinking about cutting down working hours rather than retiring? Or, perhaps you want to try something completely different? In both scenarios it could mean a hit to your monthly income.
This is where your pension could help you do this. For example, you can use your pension to help you top up your salary.
Taking money early from your pension might not be right for you, as it could leave you with less to live on than you need; it shouldn’t be seen as an easy way to raise money. That’s why it makes sense to get financial advice before making any big decisions.
“I’ve got a small pension pot. I might as well take the lot now”
Fact: Generally, leaving your money invested in a pension, as long as it’s a good one, is the best thing you can do.
Many people have welcomed the pension freedoms that were put in place in 2015. In fact, over one million defined contribution pension pots were been accessed between April 2015 and September 20173.
Over half of these pots (53%) were been fully withdrawn, with 90% of these being smaller than £30,000 and 60% smaller than £10,000.
Over half (52%) of the fully withdrawn pots were not spent but moved into other savings or investments, such as ISAs. The research indicates that some of this is due to people mistrusting pensions.
Yet, it’s very likely that the growth you would get in a pension will be far better than in a bank account or cash ISA. So, choosing to put your money in one of these standard savings vehicles rather than a pension could mean that you lose a lot of money.
Knowledge is power
Now you’ve busted the most common pension myths, you should have a better idea about your pension and what you can do with it.
After all, knowledge is power.
And if you’re thinking about your pension options, it’s easy to get all the knowledge you need in clear, plain English.
1The Sun (Online) – Newsagent found £9k pension was worthless after ‘service fees’ wiped out 11 years of savings, 15th February 2017.
2Your Money, (online) – Five myths you need to stop believing, 12th October 2016.
3Retirement Outcomes Review, Interim Report, FCA, July 2017.