For the majority of the UK population, their pension will form the cornerstone of their retirement planning. Whilst an extremely useful tool in the retirement planning arsenal, they’ve long been misunderstood. This article will clarify five pension myths.
1. Pensions are risky
Now part of the above is true, investing into the stock market does come with inherit risk. Share prices go up and down and from time to time the value of your investment could be less than you’ve contributed. In general, over a long enough time horizon, investing into a well diversified portfolio of assets has provided investors with a positive return. Using a pension not only provides up front tax relief but it also allows you to take advantage of compound growth. Try not to focus too much on the day to day gyrations and think long term.
2. I have to take the money when I retire
Out of the five pension myths, this could be one of the most common. The truth is, once you reach the minimum pension age set by the government (soon to be 57), you can withdraw money from your pension as and when you please. Of course, you may incur additional tax in some cases, but you could draw money from your pension whilst you are still working. You do not have to be “retired” to withdraw funds from your pension.
The specific rules may vary between each pension you hold, so it’s best to review them ahead of when you may decide to take any cash from your pension. If you have historic pensions, we’d suggest looking at these right away.
3. My pension dies with me
A final salary pension or Defined Benefit (DB) pension typically pays an income to a spouse or dependant at a set level. This could be that 50% of your pension income gets paid to your spouse on death, although it can vary. A typical money purchase pension, such as a SIPP will allow you to nominate who you’d like to receive your funds on death and in most cases they can inherit 100% of the value of your fund.
4. My workplace pension will be enough
We’ve come across some very generous pension schemes provided by employers and so it is entirely possible that you will have built up significant assets in your plan to allow you to retire. The reality is that if you are on the minimum contribution set by government legislation, you may not be saving enough to provide yourself with a decent standard of living in retirement. Review how much your paying in and what this could provide in retirement, if it looks a little too low, consider increasing your pension contributions.
5. I should pay off my mortgage before contributing to a pension
With interest rates on the rise, early repayment is more appealing than it was a few years ago. Before you do make early repayments, it is worth reviewing how much your current interest rate is and how long you are fixed for, it may be that you were lucky enough to secure a low rate before the interest rate rises and you could yield higher interest in a cash account. Secondly, if you are a higher rate tax payer, you are going to come away with a little less than 60p of every £1.00 earnt. If you redirect this into a pension, then you’ll receive the 40% tax relief and come away with £1.00 in your pension, which can then be invested and begin compounding over the longer term.
Whether to pay down your mortgage or contribute to your pension is a complex decision and so we’d suggest talking this through before you do either. If you’d like to discuss this with us, our first meeting is free and without obligation.
So there you have it, five pension myths. If you’d like to discuss any of the above with a local independent financial adviser, then please get in touch. Not local? We’re always happy to meet for a cuppa via video conferencing.
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