Although pensions affect us all if we are lucky enough to last until we stop working, there is a surprising amount of confusion surrounding the subject. Here are 5 common myths about pensions:
1. I don’t need a private pension, the state will support me
This is probably the most common pension myth, often used by people to justify their own lack of saving. Sadly, those taking this view are going to be sorely disappointed come retirement day. State pensions are shrinking as the government is transferring the responsibility for funding our golden years to individuals. While state pensions do exist, they are far from generous – in the UK those of pensionable age currently receive a maximum of £115.95 per week, an amount which may cover the daily living costs of the frugal but leaves no change for luxuries. The reality is that you do need a private pension and if you don’t have one, you should start saving for it right now.
2. I can’t access my pension until I stop work
Under new pension regulations introduced earlier this year, anyone over the age of 55 can access their pension whether they remain in work or not. It is perfectly possible to work well into your seventies if you so choose, continuing to earn while at the same time drawing your pension. For some this is a lifestyle choice but for those without a decent retirement fund it may become a necessity.
3. I can take all of my pension as a tax-free lump sum
It is true that you can drawdown your entire pension pot after the age of 55 if you so wish however it will not be a tax efficient use of your retirement savings. The general rule is that you can take up to 25% of your pension as a lump sum free of tax but anything over that will be taxed at your highest marginal rate. That means that you could end up paying 40% or more in tax on 75% of your pension – not a wise use of your savings in our book.
4. Annuities are obsolete
Up until April of this year most retirees were obliged to purchase an annuity with their retirement fund. The new pensions ‘revolution’ now gives them the freedom of choice to invest the money as they wish – even splashing it on a Lamborghini should the whim take them. However the guaranteed income for life offered by an annuity will remain attractive to some and future developments with regard to interest rates, which will have a knock-on effect on annuity rates, could bring annuities back into favour, especially if the market moves with the times and offers more flexible products which can compete with the alternatives.
5. A well-funded pension will be sufficient to see me through retirement
You will be surprised at just how big a pension pot you need to sustain a good standard of living post-retirement. Currently, average earnings in the UK are £26,500. If you wish your retirement income to match even that modest amount, according to this article, you will need a pot of £400,000. The fact is that if you have a large home to maintain, expensive hobbies and/or wish to indulge yourself in retirement with regular holidays you might need to expand your retirement plan to a wider range of options.
If you would like to clarify your situation with regard to your retirement savings, work out if you are falling short and make the most of your investments to ensure that you are exactly where you want to be when the time comes to give up work, feel free to contact me via email or Skype by clicking this link