A recent report found that 75% of people don’t feel that they know enough about pensions to make informed decisions.
While we’re doing our best to explain things at PensionBee, we appreciate there’s a lot of ambiguity that still exists. So, with that in mind, we’re addressing some of the most common pension myths that we’ve come across.
Read on to get the realities and put those popular pension myths to bed.
Transferring pensions into one plan is unsafe
At PensionBee we’re often asked if it’s safe for savers to ‘put all of their eggs in one basket’, and while consolidating your pensions will bring them into just one plan, it’s likely your money will be invested in a professionally managed portfolio - in a combination of shares, property, bonds and cash. As a result of this diversification, your portfolio should be able to counterbalance any dips in one particular investment in the fund.
In effect then, your money will be invested in a variety of baskets.
Elsewhere, some providers still charge unreasonable fees. These could be transactional fees when you contribute and drawdown, or charges designed to penalise you for having a frozen pension. Transferring your pensions into one pot with lower or less fees, can instantly save you money and allow you to easily manage your pension - with peace of mind too.
Pension transfer charges will eat into my pension
It’s a common misconception that moving your pension will come with high charges. Whilst every pension is likely to come with some sort of management fee, high exit fees and penalties are nowhere near as common as they used to be. This is thanks to changes in pension legislation.
High exit fees and penalties are nowhere near as common as they used to be
And even if your old provider does charge an exit fee to transfer away from them, it can still be beneficial to move your pension. After all, they only need to be paid once and the money you spend could potentially be recouped on lower fees and a better rate of return. When you transfer to PensionBee, we always check for exit fees and whether you stand to lose any guaranteed benefits with your current provider. If we do find an exit fee over £10, we’ll tell you and ask whether you still want to go ahead with the transfer.
Please be aware that we’re reliant on clear information from pension providers, so we won’t always be able to tell whether such features exist though. We also don’t check certain policies which are considered very low-risk, including where you ask us to waive our usual checking processes too.
I need a financial adviser to transfer my pension
Unless you have a final salary or defined benefit pension with safe-guarded benefits worth more than £30,000, there is no obligation to seek financial advice before you transfer a pension.
All in all the process should be relatively straightforward, and if you’ve read up on the process online and are aware of the benefits and considerations, it’s unlikely you’ll need independent advice.
The State Pension alone will be enough to support you
Even if you receive the maximum State Pension, you’ll only receive an annual income of just over £9,000, or £175.20 per week.
Although your day-to-day costs are likely to be lower in your retirement, it’s unlikely that this amount of money will be enough to support you on its own. In addition, you’ll only be able to start claiming your State Pension when you turn 65 (with this set to increase to 67 by 2028) so if you plan to retire before this age you’ll need to have even more provisions in place to support you.
A pension is unaffordable
Making a few minor changes to your day-to-day life can help to really boost your pension savings. Consider cutting back on certain spending habits - expensive dinners, luscious lunches, your coffee addiction - and you will start to really notice a difference in your pension savings. Putting into a pension shouldn’t leave you penniless and you need to make sure you’re enjoying a few luxuries during your working life, but be willing to make some sacrifices and you might be surprised at what you can afford.
For instance, if you can save an extra £100 into your pension per month from the age of 30, this will mean an additional £36,000 in your pension by the time you reach 60. Add the additional £9,000 you would receive in tax relief and your employer’s contributions, and suddenly building a decent pension pot doesn’t seem so unachievable, does it?
Property is a better bet than a pension
There’s no doubt that bricks and mortar is a good investment. Property is a tangible asset that tends to appreciate over time, but when you’re investing in property to fund your retirement there are some important things to bear in mind.
Property investments leave you liable to a number of taxes. There’s inheritance tax, capital gains tax and income tax to consider, which, when combined, can have a significant impact on your returns. In contrast, money invested into a pension attracts tax relief, and any gains made won’t be taxed. Plus, you can take up to 25% of your pension tax-free when you reach 55.
Property investments leave you liable to a number of taxes
Another factor to consider is the diversification of your pension savings. Most pension plans will be diversified, so the money you put into your pension will be spread across a range of assets (like equity, cash and bonds), but also across regions. So any drop in value in one of these carries less risk in comparison to a drop in property values, which could have a significant impact on your property investments.
Pensions are a scam and they’ll never pay out
Scams in any shape or form are always a concern and something to be vigilant about. However, pensions are tightly regulated, and the Financial Conduct Authority (FCA) is doing it’s best to weed out scams, so while it’s wise to be cautious, don’t panic.
Scammers can be very clever with their wording, and if there is ever anything you’re not sure about, you should always contact your provider directly for confirmation from them. You can also contact the FCA about anything suspicious, either by calling their helpline or reporting a scam via the FCA website.
Here are a few scam warning signs to look out for:
- Being contacted about accessing your pension early
- Being asked to provide details about your pension over the phone
- Being asked to transfer your pension to a new scheme
If something along these lines sounds too good to be true... it probably is!
You can’t join your company pension until you’re 22
Due to the ‘Auto-Enrolment’ initiative your employer will have to contribute to your workplace pension, as long as you’re classed as a UK worker, older than 22 and have a minimum salary of £10,000.
However, this doesn’t mean that you can’t start contributing to your pension before that. You can choose to ‘opt in’ to your workplace pension scheme from the age of 18, and as long as you earn over £490 per month, your employer will have to contribute to it too.
You can choose to ‘opt in’ to your workplace pension scheme from the age of 18
Starting contributions to your pension earlier will make a considerable difference to your retirement, without impacting on your current lifestyle too much. Your contributions will benefit from something known as ‘compound interest‘, which is the reinvestment of the interest earnt on your contributions.
The earlier you can start your contributions, the greater the returns will be.
You can be too old to start a pension
It’s never too late to open a pension or start contributing to it. The earlier in your career you start your contributions, the longer your investments will have to grow. However, anything you can afford to put towards your retirement at any age is better than nothing at all, and can go a long way to securing yourself a more comfortable retirement.
Worryingly, the highest proportion of people ‘opting out’ of their pension scheme is found amongst people above the age of 50. Not saving into a pension means you’re losing out on ‘free money’ from the government in the form of tax-relief, and also means you’re not increasing the 25% you can take tax-free when you reach 55!
To work out how much you should be saving into your pension, you can use our calculator.
If an employer goes bust I will lose my pension
The government has a number of procedures and regulations in place aimed at protecting your pension should your employer go bust. If you were enrolled into a defined contribution scheme, your pension will be managed by a pension provider, not your employer. So, should your employer go into administration, your money should be fine. You will however lose out on any future contributions that were due to be made. It’s worth contacting your pension provider directly to discuss your options moving forward.
If you have a defined benefit pension, it’s likely your pension will still be safe if your employer was to go bust. This is because companies running these schemes are required to keep employees’ pensions separate to the rest of their assets. However, if your employer can’t pay the value of your pension, you will still have protection from the Pension Protection Fund (PPF). You will be compensated for 100% of your pension, or 90% if you have reached the scheme’s retirement age.
You can find out more about your options if your employer was to go bust here.
Paying extra contributions is the only way to save more
Your pension at retirement is largely dependent on how much you have contributed to it through your working life. So the main way to give yourself a more comfortable retirement is to save more into it. However, sometimes this isn’t possible given your circumstances.
Find a pension plan that has a good balance of risk, reward and charge
Whatever the size of your pension pot, the performance of the fund and the fees you pay will have a significant impact on your pension upon retirement. It is important that you find a pension plan that has a good balance of risk, reward and charges. You may choose a higher risk plan earlier in your pension journey, and then as you get closer to retirement, switch to a lower risk option to steady the value of your pension pot.
Providers will supply information which indicates where your pension will be invested. Plans will also usually have factsheets, which allow you to find out more about the past performance of the funds, too. But it’s important to remember that past performance isn’t an indicator of future performance, and as with any investment, you may get less back than you started with.
You can find information on the PensionBee plans here.
A pension is lost if you die before taking it
Typically pensions sit outside of your estate. This means that your beneficiaries can access your pension, without having to pay inheritance tax on it - although the rules will vary depending on the type of pension and age you pass away. Here’s how.
If you have a defined contribution pension and die before your 75th birthday, there will be a few options. If you haven’t started drawing down from your pension, it can be passed onto your beneficiaries tax-free - as long as it’s claimed within two years - otherwise there will be some tax charges.
If you pass away before your 75th birthday but have started drawing down from the pension, the options will vary depending on how you accessed your pension. If you’ve withdrawn the full amount and have the cash in your bank account rather than your pension, this will be counted as part of your estate. If you still have funds in your pension though, your beneficiaries will be able to access them entirely tax-free.
Should you pass away after your 75th birthday, your beneficiaries will be liable to pay income tax on the pensions you have left behind. This will be charged at their marginal rate of tax, but if taken as a lump sum, it is worth remembering that this could impact which tax bracket they are classed in.
With annuities, it’s slightly more complicated. If you have already started receiving the income from this, usually your beneficiaries won’t be able to access it. However, there are certain types of annuities that will be eligible for pension transfer, you can find out about these here.
As defined benefit pensions are linked to your salary and the years you have worked for that employer, the pension rules after death are slightly different. The main factor with a defined benefit pension and your beneficiaries, is whether you retired before you died.
If you die before retiring, the pension may pay out a lump sum worth 2-4 times your salary. Again, if you’re younger than 75 when you die, this will be completely tax-free for your beneficiaries.
If you have already retired when you pass away though, your spouse, partner or dependent may receive a reduced regular payment. The rules from the provider will be stricter on who will be eligible to receive your death benefits.
Buying an annuity is the only option at retirement
Upon reaching retirement, some people prefer to have a guaranteed income, whilst others would rather be in control of how and when they access their savings. For those wanting a guaranteed income, you can convert your pension savings into an annuity. This will pay out a regular, guaranteed income for a set period of time, or until death.
However, purchasing an annuity isn’t compulsory. Drawing down from your pension keeps your pension invested, and then gives you the flexibility to access your pension as and when required. Whilst both have their pros and cons, everyone will have their own preferences and it’s important to consider your options.
Knowing how much to contribute is too difficult
It’s important to strike a balance when contributing to your retirement. You want to make sure you’re planning ahead and thinking of your future self, but you still need to allow yourself some luxuries and not stretch your finances too much.
You should try to contribute 15% of your salary into your pension
It’s reported that up to 80% of people are unsure how much they should be saving towards their retirement and a common regret of retirees is they wish they’d saved more when they were younger. The uncertainty when it comes to contributing isn’t that people don’t want to save, but more that they don’t know how much they should be putting away.
It’s commonly suggested that you should try to contribute 15% of your salary into your pension. Although this can sound like quite a lot, when you include your employers contributions, this amount can seem more realistic. This of course isn’t always possible, but factor in one-off payments too, and you can really make a big difference to your pension.
To help plan for your retirement and easily work out how much you should be contributing, you can use our free pension calculator.
Higher rate tax relief is given automatically
Putting money into a pension is a very tax-efficient way of saving. For every contribution you make, the government will also give you an additional 25% as a tax top up. So this means as a basic rate tax-payer, for every £100 you contribute, the government will pay in £25.
If you’re a higher rate or an additional rate taxpayer, then you can claim an additional 25% and 31% tax top up via your Self-Assessment respectively. You will only be able to claim this tax-relief from the last 4 years though, so if you haven’t claimed this additional tax relief before, you will still have an opportunity to receive it.
Research by us recently found that approximately 80% of higher rate taxpayers, and 54% of additional rate taxpayers eligible to claim relief through their Self-Assessment tax returns are failing to do so. This is likely to total hundreds of millions of pounds, sitting with HMRC, just waiting for these tax-payers to claim back.
You have to keep your pension where it is when you change job or retire
With the average worker nowadays having 11 different jobs throughout their career, you can end up with a lot of pensions to keep track of. Every time you change jobs, it’s likely that you will be enrolled into a new workplace pension scheme, and when you leave that job, that pension pot is likely to stay there too. This will mean you could end up with a lot of frozen pensions, that can be easily managed by consolidating them into one pension pot.
Having your pensions transferred to one provider can make them a lot easier to manage. Choosing to combine your pensions with PensionBee means you’ll be able to manage all of your money through an online dashboard in just a few clicks. Once signed up, you will then be assigned your very own BeeKeeper who’ll be on hand to support you with any questions or concerns you may have, and keep you up to date throughout your journey with PensionBee.
These are some of the common myths that we’ve come across, and I hope we’ve been able to put them to bed for you. To get started with PensionBee today and become pension confident, sign up here.
Risk warning: The information in this article should not be regarded as financial advice.