If you are approaching retirement age, it is important to know your pension is going to finance your future plans and provide the lifestyle you want once you stop working. Pension legislation is extremely complex, and it is not realistic to expect everyone to understand it completely. But, since we all hope to retire one day, it is important to get to grips with some of the basics.
Many of us have made pension provision, but some of us do not know very much about the details. To help you get a handle on some of the myths around pensions, we have provided answers to some of the things you may have been wondering about.
It is particularly helpful to become aware of the things you may have thought were facts that are actually myths. Here are some examples:
Myth: The government pays your pension
Fact: The government pays most UK adults over the pension age a state pension, which is currently:
- Retired post-April 2016 – max (full rate) state pension of £179.60 a week
- Retired pre-April 2016 – max (full rate) basic state pension of £137.60 a week (a top-up is available for some, called the additional state pension)
Not everyone is eligible for the full amount, which requires you to have at least 35 qualifying years on your National Insurance record. If you have less than ten qualifying years on your record, you will receive nothing.
This is true for those with only a post 5 April 2016 National Insurance record – those with a pre 6 April 2016 National Insurance record get the better of the old and new state pension schemes (and the old one gave some benefit with 1 year’s National Insurance and a full pension with 30 years’ National Insurance).
Myth: Your employer pays your pension
Fact: Most people are automatically enrolled into a workplace pension. Your employer is usually required to pay a minimum of 3% of your salary into it and you must also pay a minimum of 5% of your salary.
Where the employer only pays 3% this would be true – there’s no employee minimum as such but the employee must make up any shortfall between the total minimum and the employer contribution. And some schemes have their own additional rules on minimum employee contributions.
Salary definition varies, if qualifying earnings is used then it’s 3% of earnings within the band and not all salary.
If you keep your contributions at the minimum level, it might be difficult to save enough for retirement. As life expectancies grow longer, your retirement can be almost as long as your working life. It’s therefore important to put aside a portion of your earnings to create a pension pot that will enable you to receive the income and live the lifestyle you want during retirement.
Myth: You cannot save more than your Lifetime Allowance
Fact: There is a Lifetime Allowance on the benefits you accrue within your pension, which is currently £1,073,100 (tax year 2021/22) and frozen to 2025/26. That does not mean that you cannot withdraw any more after that, but it does mean that you will pay a tax charge of up to 55%. However, there are ways of withdrawing the money with a tax charge of 25%.
The Lifetime Allowance charge is tested when funds are accessed, or on death before 75 with uncrystallised funds or on reaching age 75 with uncrystallised funds or drawdown funds.
So, your pension will be tested at some point whether funds are withdrawn or not.
Myth: Your pension provider’s default fund is suitable for everyone
Fact: Most pension default funds will start out with a high-risk strategy and steadily move your capital into lower-risk investments, such as bonds and cash, as you get closer to retirement. This is to reduce volatility in the value of your investments so that you can have a higher degree of confidence in how much you’ll eventually end up with.
If you do not plan to purchase an annuity, you do not necessarily need to reduce volatility before retirement. You may be leaving some of your money invested for several more decades, in which case a higher risk strategy may be more appropriate.
Myth: Annuities are outdated
Fact: There was a time when almost everyone bought an annuity when they retired, and that time has passed because there are now alternative ways to access your pension savings.
But annuities still have a useful role for generating a retirement income and can be an appropriate product for some people. Unlike other pension withdrawal methods, such as drawdown, an annuity offers a fixed income for life, so there’s no risk of your money running out. This is sometimes a crucial benefit for many pensioners.
Myth: You cannot pass on a pension
Fact: If you have used your pension savings to purchase an annuity, the income from this will usually cease when you die. But if you have pension savings that you have not used to buy an annuity (for example, if you have been taking an income through drawdown), what is left can be passed on to a loved one.
If you die before the age of 75 there will usually be no tax to pay by the beneficiary unless there is a Lifetime Allowance charge. Otherwise, they will need to pay income tax according to their tax band.
- Children’s pensions
- Defined benefit (or final salary) pensions
- Defined contribution pensions
- Personal pensions
- Self-Invested Personal Pensions (SIPPs)
- The state pension
- Annual allowance and lifetime allowance limits
- Busting myths about pensions
- Increases to pension age and new normal minimum pension age
- Pension freedoms
- Pension withdrawal methods
- The lifetime allowance
- Delaying retirement
- Generating income from investments throughout your retirement years
- Importance of a retirement wealth check
- Retirement goal setting
- Retirement planning
- Reviewing your retirement plan
- Staggered retirement
- Taking control of your retirement plans
- What can I do with my pension?
- What happens to my pension on death?
- Discretionary Fund Managers
- Market timing
- Minimising risk
- Multiple asset classes
- Portfolio insulation
- Pound cost averaging
- Principles of investing
Growing your wealth
Goals based investing
- Cash flow modelling
- Creating a financial roadmap
- Investment objectives
- Timescales and market activity and the impact of losses
- ‘What if’ scenarios
- Discussing legacy planning with your loved ones
- Inheritance Tax (IHT)
- Inheritance Tax Residence Nil Rate Band (RNRB)
- Lasting power of attorney
- Lifetime transfers
- Making a Will
- Preserving wealth for future generations
- Protecting your assets for the next generation
- Slicing up your wealth pie