Thousands of people are growing their pension funds for a comfortable retirement. You can, too, by setting straight these five pension myths.
Regardless of your age, dealing with pensions can be challenging and awe-inspiring. The basic principle is straightforward; pay money in, invest it, and get an income when you retire.
However, pensions can differ drastically from scheme to scheme. You need to consider its benefits, performance, charges, and other factors when choosing one. The challenge of gathering all the information you need to decide can be off-putting.
In the absence of information, myths can arise. This article aims to debunk such myths so you can join the thousands of people drawing their pension funds for a comfortable retirement. Avoid financial mistakes, make use of regulated financial advisors such as Portafina before you jump in to big decisions that could affect your future.
Myth 1. You cannot access your pension funds before retirement.
This statement might appear common sense, as the function of a pension is to provide retirement income. However, pension freedoms introduced in 2015 mean you may be able to access your pension funds from age 55.
With certain pensions, you now have greater flexibility with what to do with your money. You can take some or all of it as a cash lump sum, the first 25% of which is tax-free.
As appealing as this may seem, you should not take too much money from your pension without considering the consequences. Doing so could leave you short of income when you retire.
Myth 2. Pension funds do not require management.
We’ve already stated that the principle behind pensions is straightforward. However, that does not mean they can be left to their own devices. If your pension is to contribute to your retirement fund to its maximum, it requires management. That’s where financial professionals are invaluable.
Your pension funds get invested in the stock market for your pension funds to grow. The reason for this is that this is the place where it is most likely to grow.
However, markets can go down as well as up. Therefore, you need to have a clear long-term investment strategy, knowledge of stock trading, and an awareness of the risks involved in the stock market. Without these, you will likely make irrecoverable errors with your funds and jeopardise your retirement.
Myth 3. The State Pension is the same for everyone.
The statement is not entirely true. However, the amount you receive in state pension benefits depends upon how many years’ worth of National Insurance contributions you have made. You must have contributed for 35 years to receive the full pension, but these do not need to be consecutive.
National insurance contributions get deducted from your pay at source. You can see how much you pay on your monthly payslip. If you’ve had any gaps in your contributions, you will need to make these up to receive the full pension.
Myth 4. Your pension is worthless when you are dead.
A pension is a long-term saving strategy, and a lot can happen in the decades you save into it. If something were to happen to you before your pension matured, it would not be right that you lose your money.
Another benefit of the pension freedoms introduced in 2015 is that it is now easier to pass on your pension funds to loved ones. Therefore, you can rest assured that your money will not be lost in the unfortunate event of your passing before your pension matures.
You should inform your pension provider of the person(s) to whom you want your money to go. Your pension is not classed as inheritance, so it does not carry the same tax burden as other assets.
Myth 5. Workplace pensions will grow without help.
You should be auto-enrolled into a workplace pension if you meet the relevant criteria. These schemes are excellent as they are helping millions of workers prepare for their retirement.
However, every time you change jobs, you will change pension schemes. Therefore, you may have multiple workplace pensions, and it can be easy to forget about them.
Forgotten, lost, or misplaced pensions make up part of a £19.4 billion black hole in UK pension funds1. If you do not keep track of your pensions, your money could become part of these lost billions.
Thousands of people enjoy comfortable lifestyles in retirement because they maximize their pensions. Common urban myths about pensions can quickly spread. Believing such misinformation can convince you to jeopardise your future. Hopefully, this brief article has debunked some of these myths, so you can save into your pension and enjoy a comfortable retirement.
*The Association of British Insurers: as of 2020