The 5 Biggest Pension MisconceptionsWritten on September 13, 2024 by Kirk Rice LLP
It’s difficult to understate the value and importance of pensions. They’re one of the most tax efficient ways to accrue money for later years.
Many younger people don’t tend to think about later life finances. But a little effort put into understanding and contributing to pensions early on, can set them up for a comfortable later life.
Those closer to retirement age may hold preconceptions about pensions that could lead to them not appreciating their full value.
Below our Paraplanner, Tom, busts a few common misconceptions about pensions and shares some compelling facts too.
Misconception: “My pension isn’t really my money”
Answer: Many people are automatically enrolled in defined contribution pensions by their employers and don’t think about them until retirement nears.
A common myth is that the money isn’t really theirs, but from age 55 (rising to 57 in 2028), it’s as almost as accessible as a bank account. While taxable, the money is entirely yours and secure.
Fact:
In the UK, nearly all pensions (except rare occasions) can pay out 25% of its value tax-free, or more in certain cases. This is known as the Pension Commencement Lump Sum. Learn more in our factsheet here: Factsheets
Misconception: “My Pension dies with me”
Answer: A final salary scheme or annuity typically only provides income to a dependent upon death, but most other pensions allow you to leave the entire amount to any beneficiary. This is outside your estate, so it’s not subject to inheritance tax, showcasing the tax efficiency of pensions.
If you pass away before age 75, your beneficiaries can access the pension tax-free; if you die after 75, they will pay income tax on the funds.
Misconception: “My house is my biggest asset”
Answer: Pensions account for about 42% of Britain’s wealth, compared to 36% for property. Many people don’t realise the value of their pension until they near retirement when pension providers start communicating more. While many focus on securing better mortgage rates and managing other finances, they often overlook what may be their biggest asset.
Explanation: Flexi-Access Drawdown
Flexi-Access Drawdown lets you flexibly access your pension savings, allowing you to withdraw any amount or receive regular income, subject to tax. Not all pensions offer this, so if you’re interested, feel free to call us to discuss your options.
Misconception: “I’m years from retiring, ill think about my pension later”
Answer: Starting to save early is crucial because the longer your money has to compound, the more it can grow. Even small contributions made early can significantly outpace larger contributions made later, highlighting the power of time in building wealth. If you’re in your 20s or 30s, it’s strongly recommended to start thinking about your pension now, rather than later.
Misconception: “I don’t have a pension”
Answer: Pensions can be easily overlooked since employers often set them up when you start a new job. In the UK, if you’re over 22 and earn at least £10,000, you likely have a workplace pension. Even if you don’t, 10 years of National Insurance contributions or credits qualify you for the State Pension. So, you may have a pension without realising it.
If you have questions about your pension or require financial advice call us on 01344 875 000. You can email us at info@kirkrice.co.uk
Please note: This article is correct as at the publication date. The answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made. The information is based on current tax legislation which may change in future. Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of relief from taxation are subject to change. The Financial Conduct Authority does not regulate tax planning.
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