28th July 2016 at 3:38pm
We’re all guilty of taking things at face value, or listening to the advice of our peers without question. But when it comes to our finances – and retirement savings in particular – this could lead to some bad decision making.
The need for clarity
The world of pensions is constantly evolving with much more flexibility and choice on offer, which is a positive for savers. However, there is a surprising amount of confusion around the subject, and getting the story straight is essential.
As a result we thought it might prove helpful to bust some of the more common myths and misconceptions out there.
Myth – I don’t need a private pension, the State will support me
Those who believe that the State will provide them with a comfortable pension in retirement may be fooling themselves.
The full rate for the New State Pension is £155.65 per week, but it’s important to understand that it doesn’t mean everyone will get that amount – it could be more or it could be less, largely depending on your age and National Insurance record. And not only that, but State Pension age for those retiring after 2028 is age 67.
The reality is that most people do need to save more into a private pension to afford the retirement they dream of at an age they want it.
Myth – You have to stop work and retire to draw on your pension
No. As long as you’re 55 or over, you may access your pension regardless of whether you continue to work. And with people enjoying improved health and wishing to retain a certain lifestyle, the possibility of drawing some pension benefits to top-up income from part-time employment may be attractive. Same income, more time off!
Myth – I will pay income tax on all the money I withdraw from my pension
Part of your pension fund will be tax free – 25% in most cases, known as your ‘tax free cash’ amount. The rest will be taxable as income, but a sensible withdrawal strategy can ensure that the tax paid is relatively small.
While it is possible to take all of your pension out in one go, ¼ will be tax free, the rest added to any other income you have in the same year and taxed in one go. This means a large slice of your pension income pot could be taxable at 40% or even 45%, even if you are normally only a basic rate taxpayer.
If you want a regular income from your pension savings, you can ‘phase’ your withdrawals to provide the income you need each year, such that each one comprises ¼ tax free cash and ¾ taxable income. In this way you can minimise the amount of tax you pay annually, particularly if you have any unused personal allowance and/or you avoid paying income tax at higher rates.
While it is possible to take all your tax free cash before you start taking the taxable income part of your fund, this may be a waste of your tax free personal allowances.
Myth – When I reach age 55, I will be offered all the new pension freedoms from my existing provider
Not necessarily. Providers are not legally obliged to offer all the new freedoms that landed back in April 2015. Many even warned before April 6 that they might not be able to offer the fully-flexible access savers, and the Government, expected.
However, you can transfer your pension to another provider to access these freedoms, but check before transferring that you will not lose out on any benefits that may have been associated to your original plan.
Myth – Annuities no longer exist
New pension freedoms do not mean we’ve seen the last of annuities – far from it, they will still remain attractive for some.
True, they don’t offer the fresh flexibility that’s now on offer, but they do provide a secure income.
And, as annuities depend on life expectancy, if you have ill health issues you may benefit from enhanced rates. It may also be possible to buy an income for your spouse or civil partner too, in the event of your death.
The choice of how to take your benefits is not ‘all or nothing’. With the pension changes now giving savers many more options, you can provide your retirement income from a mix of annuities, tax free cash lump sums and flexible income.
Myth – My pension should be enough to see me through retirement
Statistics show we’re living longer. The average life expectancy in Britain has increased by 30 years during the 20th century. This means we could all be spending longer in retirement than ever.
So saving as much as you can and for as long as possible has never been more important.
While freedoms and flexibility can be a great thing, it’s also vital people budget appropriately when they reach retirement to reduce the risk of running out of money too soon.
Our retirement calculator can help you to get an idea of how much you need to save for your retirement.
Get your facts straight
When it comes to planning for and making the most of your retirement, then knowledge is power. That’s why it’s important to make sure you can separate the wheat from the chaff and not be swayed by common myths or hearsay – if in any doubt always seek out professional advice.
A pension is an investment. Its value can go up or down and it may be worth less than you paid in. Investment returns aren’t guaranteed. Past performance is not a reliable indicator of future performance. This blog and any responses are not financial advice.
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