Saving into a pension is one of the best ways to ensure that you’ll enjoy a comfortable retirement, but there are all sorts of misconceptions which can put people off.
Here, we expose some of the biggest myths that might be preventing you from making the most of pensions.
If I’m working part-time or taking a break from work, I can’t pay into a pension
You can still contribute to a pension if you’re working part time, or even if you’re currently not working.
Whether you work part or full-time, provided you’re earning a minimum of £10,000 from a single job and are aged 22 or over, you’ll automatically be enrolled into your employer’s workplace pension, into which both you and they must contribute.
If you earn less than £10,000, you can still join your company pension scheme, but you’ll have to ask to opt into it. You can read more about this in our article Can I join my workplace pension scheme if I’m on a low salary?
If you’re not currently working or are working part-time and don’t have access to a company scheme, you can pay into a personal pension if you’re able to or your spouse or someone else can do this on your behalf. Learn more about this in our article Can my husband or wife pay into my pension – or can I pay into theirs? You’re allowed to pay in up to £2,880 a year into a pension as a non-taxpayer, and tax relief will boost that amount to £3,600
I’m too old to start a pension
It’s never too late to start saving into a pension, although the tax benefits of saving into a pension scheme stop at age 75. Find out more about saving into a pension for the first time.
If you’re in your 50s and 60s it’s still well worth having a pension as your contributions will qualify for tax relief, or money back from the taxman. What’s even better is that as you’re closer to taking your pension, the tax benefits can appear even more attractive. This is because the tax relief stays the same, but you can access the money you put in much sooner than someone in their twenties can.
If you’re a basic rate taxpayer, a £100 contribution into your pension will only cost you £80, whilst if you’re a higher or additional rate taxpayer the same contribution will set you back only £60 or £55. Find out more about pension tax relief in our article How pension tax relief works.
Remember though, the earlier you start saving into a pension, the longer you’ll have to build up your savings, and the longer your investment returns will have to grow, hopefully providing you with a better income when you stop work. If you’re not sure how much you should be paying into a pension, read our article How much should I save for retirement?
I don’t need a pension because I own a property
Soaring house prices over the last twenty years mean that many people now have a substantial amount of their wealth tied up in their homes and might be tempted to rely on property rather than a pension to fund their retirement.
However, before forgoing pensions, it’s important to think practically about how using your property as your pension might work. For example, you’ll usually have to sell your property and downsize if you want to free up cash from it, which may mean leaving a home you love. There will be steep costs involved in doing this too, such as legal fees, estate agency costs and stamp duty on the next property you buy. Learn more about some of the things you’ll need to consider if you’re thinking about downsizing in our article Five questions to ask yourself if you’re considering downsizing.
It’s also worth bearing in mind that house prices could fall in future, so that by the time you reach retirement your home might not be worth as much as you’d hoped.
If you’re relying on a rental property to provide you with an income in retirement, you might have periods without a tenant, and you’ll have to cover maintenance costs and lettings fees. Read about the pros and cons of owning a buy to let property in our guide Is buy-to-let a good investment?
With a pension, although your money is locked away until you reach the age of 55, it is usually invested in a wide range of investments, helping spread risks. You also benefit from tax relief on your contributions, boosting the amount you save. Find out more about how pensions and property compare in our guide Should I take an income from my pension or property?
My pension will be lost when I die
Pensions can actually be a very tax-efficient way of passing your money onto future generations.
If you have a defined contribution pension and die before you retire, your pension will usually pass tax-free to the person you nominated when you first started paying into it.
If you didn’t nominate anyone, the trustees of your pension can award it to anyone who’s financially dependent on you, for example, your children or spouse.
If you die after you’ve retired but before the age of 75 and you were taking an income from your pension using flexible drawdown or flexi-access drawdown at the time, your dependants can receive a tax-free income from your pension. However, if you die when you’re over the age of 75, your pension pot will still transfer tax-free, but your dependents will have to pay income tax on any income they receive from it, in the same way as you would have.
It’s usually only if you’ve used your pension to buy an annuity or income for life that your retirement income stops when you die, although some annuities may continue to provide an income for a dependent.
Whilst each scheme is different and you should check the details of your current pension, if you have a defined benefit pension and die before you retire, your scheme may actually pay out a tax-free lump sum that’s typically two or four times your salary. It may also provide what’s known as a ‘survivor’s pension’ to your beneficiaries.
If you’ve already retired and started receiving an income from your final salary pension when you die, usually a proportion of your pension will be paid to your spouse or partner and/ or any dependent children. These post death benefits can be hugely valuable, so it’s worth speaking to your current pension provider to understand your own situation. You can find out more about this subject in our article What happens to my pension when I die?
I could lose my pension if my employer runs into financial difficulties
If you pay into a defined contribution pension, where the amount you get when you retire will depend on how much you paid in and how the investments your money has gone into have performed, you won’t lose your pension savings if your employer goes bust.
Your pension will usually be run by a pension provider and not by your employer, which means it will be protected even if your employer goes out of business.
If your defined contribution pension is a ‘trust-based’ scheme, whereby it’s run by a trust appointed by the employer, you’ll still get your pension if your employer goes out of business, although you may get a reduced amount because the running costs for the scheme will have to be covered by members’ retirement savings rather than by your employer.
The situation’s different if you have a defined benefit or final salary pension, where the income you receive at retirement is based on how many years you’ve belonged to the scheme and a proportion of your final year’s pay. Your employer is responsible for making sure there’s enough to pay you your pension at retirement, but even if they get into financial trouble they can’t touch your retirement savings.
If they go bust and can’t pay you your pension, you’ll usually be protected by the Pension Protection Fund. This will typically pay you 100% of your pension if you’ve reached the scheme’s retirement age, or 90% if you’re below the scheme’s pension age.
Where to go for help
If you’re 50 or over and have a defined contribution pension, you can get free guidance on the options available to you from the Government’s Pension Wise service. However, if you want personal recommendations or advice about your specific circumstances, you’ll need to seek professional financial advice. You can find a local financial advisor on VouchedFor or Unbiased, or for more information, check out our guides on How to find the right financial advisor for you or How to get advice on your pension.
If you think you might be interested in speaking with a pensions expert, Rest Less Financial Services is now offering our members a free Pension Health Check with a Rest Less Pensions Expert.
Have any of these myths put you off saving into a pension, or are you still deciding which type of pension to go for? You can join the money conversation on the Rest Less community or leave a comment below.