Pension myths bustedPosted by Andrew Stallard
Andrew Stallard concludes his three-part look at state pension and private pension provision.
With final salary pension schemes becoming less common and more people having to fund their own retirement with a money purchase pension, our pension geeks are on a mission to bust some commonly held myths about these types of pensions.
Myth number 1 - if you die before retirement the money accumulated in your pension is lost. Not true. With most pensions, should you die before retirement, the money will be paid 100% tax free to your estate or spouse (1). And, as most pensions are written in Trust the money is considered outside your estate so it is not included in any inheritance tax calculation - an extra bonus.
Myth number 2 - you cannot access to your pension until you are 65 or retire. Not necessarily true. One advantage with a private pension is that you can access the money from age 55 and 25% can be taken as a tax free lump sum (1).
What you do with your lump sum is entirely up to you - you could pay off a mortgage, buy a dream car or even take a trip to Disneyland, whatever you fancy. It always surprises us that most people spend longer planning their annual two weeks in the sun than thinking about their retirement that could last twenty or thirty years. If you think about it, retirement is potentially the longest holiday of your life and as most children (and our advisers) will agree, a holiday is not nearly so much fun if you don’t have enough spending money.
Myth number 3 - people who plan to stay with a company only a few years often put off joining a pension scheme as they think the money will be lost when they leave. Wrong again. Any money paid into a pension scheme will be there for you at retirement or age 55 and one of our jobs is helping people track down long lost pension schemes.
A lot of us now reach retirement with several pension plans. Should you change jobs, company schemes can usually be left invested or transferred to the new company scheme, or even amalgamated with a personal pension. Be aware though that if you leave a company scheme the charges can increase, so it's worth investigating the transfer option.
Myth number 4 - pensions are very risky. Obviously, there will always be an element of risk with a pension, but you do have control over how much risk you're prepared to take. Many pension schemes will offer a choice of funds with graded levels of risk. At the lowest end of the scale, a cash fund can be chosen with similar risks to a building society account. As a general rule of thumb, the younger you are and therefore the longer you have until retirement, the more risk you can afford to take. Many pension schemes will offer lifestyle funds that will automatically move money from higher risk investments to lower risk ones during the last ten years until retirement.
Myth number 5 - pension saving is too expensive. Unfortunately, the longer you put off starting saving, the more expensive it becomes. A pension plan is really a long term holiday savings plan with some key advantages. For every £8 you contribute the Government will give you £2 in the form of tax relief (and higher rate tax payers get much more) and the growth of your pension is largely tax free.
If you start a pension immediately you start work and pay 10% of your pay into a pension, that should provide a good basis for a comfortable retirement. However the success of a pension plan depends on how much you pay in but also the investment performance and the charges made by the scheme. If 10% sounds a lot remember with vastly increased life expectancy you could have twenty to thirty years of retirement to look forward to.
The value of shares and investments can go down as well as up.
Past performance is not a guide to future performance.
1. Pensions Advisory Service
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