There are a lot of popular misconceptions out there about personal finance, but there are few areas where incorrect information can hurt you as much as retirement planning. The potential problems multiply when it comes to the United Kingdom’s complex pension system with its ever-changing set of rules. However, once you understand the basics of how pensions work and can separate the truth from fiction, things become a bit simpler. Here are the 7 most pervasive myths and misconceptions about pensions. We’ll also explain why some of these misconceptions are so popular.
If I’m Not Working Full-Time for an Employer, I Can’t Pay into a Pension
Part-time workers can pay into a pension just like full-time workers. If you earn less than £10,000 a year, you will not automatically be included in the workplace pension, but you can opt-in. The rules say you have to be allowed to join if you earn more than £6,240 per year (as per DWP regulations for the 2020-21 tax year).
What if you’re not currently working? You can pay into a personal pension instead. British law allows you to pay up to £2,880 pounds annually into a pension as a non-taxpayer and still receive tax relief.
If you need help, services like Portafina will allow you to have your pension pot evaluated by a professional. They are a top 100 UK financial advisor and will be able to help you understand your options regarding corporate pensions and personal pensions. They can also facilitate the management of personal pensions and talk you through your annuity options.
I’m Too Young to Contribute to a Pension
If you are 22 or over and earning £10,000 or more a year then you should be automatically enrolled into your employer’s workplace pension scheme. Workers aged 16-21 generally have the option to opt into their employer’s workplace scheme, too. The level of employer contributions will depend on the salary and specific terms of the scheme.
I’m Too Old to Start Saving for Retirement
It is true that tax relief for pension contributions stop at age 75, but you can contribute to a pension at any age. If you’re in your 50s or 60s, in most cases you should contribute to a pension. You’ll qualify for tax relief when you do so. Many people hit their peak earnings toward the end of their careers, which means the more you can afford to contribute, the better your pension should be.
I Don’t Need to Save for Retirement Because I Own a Home
A property is often someone’s greatest asset. Unfortunately, it can be difficult to tap into that wealth, unless you plan on selling the property and moving into a cheaper place. You also can’t guarantee that you can sell your home at today’s high property prices. This is why having a pension is still a great option as an additional layer of protection.
My Pension Disappears When I Do
If you have a defined contribution pension and you die before you reach 75 your pension usually passes on tax-free to the person you nominated. If you don’t nominate someone, the trustee of the pension can award it to anyone financially dependent upon you. This is generally one’s spouse or children. Note that this may be different from what you say you want to happen in your will.
If you pass after you’ve begun taking pension payments but before the age of 75, your dependents should continue to receive tax-free income from the pension. If you pass after the age of 75, the pension pot generally transfers to your dependents tax-free. The key difference is that they’ll have to pay income taxes on any income they receive from the pension. Find out more here.
If you bought an annuity with your pension, then the retirement income may stop when you pass. This is probably the basis of this common pension myth. However, this will depend on the annuity itself. Some annuities continue to provide income to your dependents. Read the pension plan’s terms to know what it will provide as a survivor’s pension, i.e. a pension paid to your beneficiaries. And know that you are not required to buy an annuity when you retire.
My Employer’s Financial Problems Threaten My Pension
If you’re paying into a defined contribution workplace pension, both you and your employer are generally contributing to the fund. The money is invested by a pension provider, not managed by your employer. This means the pension will continue to operate even if your employer goes bankrupt. It also means your pension is untouchable by a company that’s in financial distress.
If you have a final salary workplace pension (also known as a defined benefit scheme) your pension should be protected by the Pension Protection Fund, even if your employer goers out of business.
You Can’t Opt-Out
It’s generally wisest to continue contributing to your workplace pension so that you can see the associated tax relief and earn the employer’s contributions. However, you do have the right to opt-out.
On the other hand, you don’t have to stop working to draw on your pension. If you’re 55 or older and you have a qualifying scheme, you can withdraw money from your pension. This may allow you to work part-time instead of full time in your later years. Taking pension money early isn’t right for everyone, though. It could leave you with less to live on in retirement and shouldn’t be seen as an easy way to raise funds.
Contributing to a pension is arguably the best way to ensure you enjoy a comfortable retirement. So, try not to let popular myths and misconceptions get in the way of a potentially more secure financial future.