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.
The myth
If I’m working part-time or taking a break from work, I can’t pay into a pension
The reality
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 monthly payment that’s equivalent to £10,000 a year, your employer should auto-enrol you in their pension scheme. So, for example, someone on £1,000 per month but who only works six months of the year will still need to be auto enrolled even though they don’t earn £10,000 from that role (as they would if they worked for 12 months). Both you and your employer must contribute to the scheme. You can find out more about auto-enrolment in our guide How does pension auto-enrolment work?
If you earn the equivalent of less than £10,000 a year, 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
The myth
I’m too old to start a pension
The reality
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 working. If you’re not sure how much you should be paying into a pension, read our article How much should I save for retirement?
The myth
I don’t need a pension because I own a property
The reality
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 at least the age of 55 (rising to 57 by 2028), 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 guides Pension or property: which is best for retirement? and Should I take an income from my pension or property?
The myth
I can’t continue to work once I’ve started taking my pension
The reality
Current pension rules usually enable you to access your private or personal defined contribution pension from age 55 (rising to 57 by 2028) and do as you wish with your lifetime savings. You can take up to 25% of your pension as a tax-free lump sum, with any further withdrawals taxed as income at your marginal rate. Meanwhile, you can continue working as long as you like while using your pension to supplement your income. You may want to reduce your hours, go part-time, or search for other employment opportunities before stopping work for good. Find out more in our article Can I take my pension at age 55 and still work?
However, if you have a defined benefit, or final salary pension, the rules are different, as most schemes have a retirement age of 60 or 65. With this type of pension, you usually can’t start receiving an income from your pot until then, although you may be able to take your pension from age 55 in some cases (for example, if you’re willing to accept a lower income from your pension in retirement). Check the precise age you can access your pension with your scheme provider. Read more in our articles What is a defined benefit pension? and When can I retire?
You can receive your State Pension while continuing to work. However, the current State Pension age is 66 for both men and women (rising to age 67 by 2028) so there’s around a 10-year gap between when you can take your money from a workplace or private pension and your State Pension age.
Alternatively, you can choose to defer your State Pension if you don’t need the income yet, to receive a greater amount at a later stage. Read more in our articles How the State Pension works and Eight reasons you might decide to defer your pension.
The myth
I have to use my pension to buy an annuity when I retire
The reality
Before pension freedom rules were introduced in 2015, most people with defined contribution pensions used their pension savings to buy an annuity, or income for life, when they reached retirement. An annuity is essentially a contract with an insurance company. In return for handing over some, or all of your pension savings, you’ll be paid a guaranteed income with the amount of income you’ll receive dependent on factors such as your age and health. You can find out more in our guide Annuities explained.
Whilst annuities are still used by many people, pension freedoms mean that those looking for greater flexibility also have the option of drawdown – often known as flexible drawdown or flexi-access drawdown. This is a way of taking an income from your pension as and when you need it.
This means, for example, that in years when you might have other sources of income, perhaps from part-time work, you may decide to draw down a limited amount, which you could then increase if your part-time work ends. Find out more in our guide Your pension options at retirement, or about pension drawdown in our guide to How pension drawdown works.
The myth
My pension will be lost when I die
The reality
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 dependants 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 are 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?
The myth
I could lose my pension if my employer runs into financial difficulties
The reality
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 is 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. Find out more about how your savings are protected in our guides How safe is my pension? and Are my savings safe?
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’re considering getting professional financial advice, Unbiased is offering Rest Less members a free pension review. It’s a chance to have a qualified independent financial advisor (IFA) take a look at your pension arrangements and give an unbiased assessment of your retirement savings.
The review is free and without obligation, but if the IFA feels you’d benefit from paid financial advice, they’ll go over how that works and the charges involved.
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