Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest. Before transferring a pension, compare all the benefits, charges and features and always seek advice if you are unsure.
Saving enough money for a comfortable future is hard enough, so there’s no sense making things more difficult than they need to be.
Yet too many of us do just that, thanks to misconceptions that foster bad habits and push our financial goals even further out of reach. It’s especially true when it comes to pension saving because missed opportunities, and what may seem small mistakes now, can add up to have a significant impact on the size of you pot and lifestyle in retirement.
Here are five common pension myths that risk derailing your financial future - unless you can avoid them.
1. ‘I don’t trust pensions - it’s not really my money’
Saving into a pension means sacrificing money now so that it’s there for the future but some seem to think that money held in a pension is somehow no longer theirs - preferring to keep their money where they can get at it.
This can be a big mistake because pensions are, mathematically speaking, often the most tax efficient place to save your money.
Pension money is still definitely yours even if you can’t access it straightaway. Current rules allow you to access your pension from age 55, rising to age 57 in 2028. The confusion comes, perhaps, because of scare stories about pensions being at risk of new taxes by the government. Pension contributions benefit from tax relief. A £1 contribution today costs you 80p if you’re a basic-rate taxpayer, as little as 60p if you’re a higher-rate taxpayer and 55p if you pay additional-rate tax. If paid into a SIPP - a self-invested personal pension - basic rate tax relief is added automatically while the rest can be claimed via self-assessment.
Once inside a pension your money can grow free of capital gains tax and then be withdrawn, with 25% of it available tax-free (up to a limit of £268,275) and the rest at your taxable rate of income. The biggest benefit comes if you contribute at one tax rate but withdraw at a lower one.
And yes - tax rules may change, and they could get less generous. However, it is very unlikely, based on previous changes, that any change would apply only to money already contributed.
2. ‘I’ll sort my other finances first’
We all have a long list of demands on our money. If it isn’t the rising cost of living, it’s meeting housing costs or paying for children. These can often leap-frog retirement saving in our priorities.
It’s understandable, but it might cost you in the long run. The earlier you invest the more opportunity there is to benefit from the stock market’s long-term growth potential. Of course, there are no guarantees, but starting earlier - rather than later - can make your money work harder over time.
By way of example, the chart below shows two people saving the same amount for the same number of years - but one starts earlier than the other. This example is just an illustration - in reality, investment values fall as well as rise rather than give a steady return. Charges would also apply and reduce any returns.
Petra starts investing £1,000 a year at 25 years old but stops paying in when she’s 55, while Jonathan invests the same each year from age 35 and stops at 65. By the time they both reach 65 Petra has significantly more. This is the power that investing sooner rather than later can have.
3. ‘Paying in the minimum is enough, isn’t it?’
Lots of us are now automatically enrolled into a pension by our employer. The minimum contribution rate applied by many employers for this type of pension is 8% of your salary above £6,240, with 5% coming from you, 3% from your employer and the remainder made-up from tax relief.
Job done? I’m afraid not. Despite this being the default for many it’s highly unlikely that contributions at these levels will give you the retirement you’re hoping for. A more realistic contribution rate if you want to achieve a moderate standard of living in retirement might be 15% or higher - and that’s if you begin saving early in your career. If you delay, you may have to pay in even more.
If you are lucky, your employer will contribute more than this on your behalf. You may need to elect to pay in more to maximise any contribution your employer pays in. Always maximise the help on offer if you can. Beyond that you may want to pay in more, either inside your workplace scheme or via a Self-Invested Personal Pension (SIPP) that you control.
Fidelity’s new retirement calculator can show you if you’re saving enough to fund the lifestyle you want in retirement, and the differences that saving more and retiring sooner or later could have on your projected income.
4. ‘I’ve got loads of pensions - I must be fine’
It’s likely you’ve built up several pensions over your working life. While it’s good to have money held in these pensions it can become problematic if you lose track of how much you have, what investments you hold and the charges you’re paying. If you don’t keep on top of your pension savings, you won’t know whether you need to increase your contributions or alter your investment mix to keep your plans on track.
Bringing your old employer pensions together into a Self-Invested Personal Pension (SIPP) can help. With a single view of your retirement savings you’ll be able to clearly see what you have and how your investments are split, enabling you to take action and more easily make adjustments if you need to.
5. ‘I’ll choose the wrong investment’
One of the biggest barriers people have saving into their own pension is the thought that they will have to pick investments and could lose all their money if they get it wrong.
In reality, most providers offer straightforward options to help you choose investments that are right for you - and these can be just as successful as the investment picked by so-called experts.
For those unsure where to start, Fidelity offers Retirement Builder - a medium-risk investment option that aims to aims to achieve stable growth over the medium to long term (ideally, at least five years). Holding a mix of assets (such as cash, bonds, equities) across different global regions to give you a well-balanced spread.
And Navigator can provide you with a diversified fund in a few easy steps, based on the level of risk you’re comfortable with and the investment approach you want to follow. These funds hold various asset classes and regions to target specific goals and risk tolerances, and to help limit exposure to a single asset or risk.
In summary, if you avoid misconceptions you’ll be removing some of the most common barriers that people have to saving more and the chance that your retirement prospects will be improved in the long term. Don’t let pension myths like these get in the way of hitting your saving goals.
Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. This information and our guidance tools are not a personal recommendation in respect of a particular investment. You should regularly reassess the suitability of your investments to ensure they continue to meet your attitude to risk and investment goals. Eligibility to invest in a SIPP and tax treatment depends on personal circumstances and all tax rules may change in the future. Withdrawals from a SIPP will not normally be possible until you reach age 55 (57 from 2028). It’s important to understand that pension transfers are a complex area and may not be suitable for everyone. Before going ahead with a pension transfer, we strongly recommend that you undertake a full comparison of the benefits, charges and features offered. To find out what else you should consider before transferring, please read our transfer factsheet. If you are in any doubt whether or not a pension transfer is suitable for your circumstances we strongly recommend that you seek advice from one of Fidelity’s advisers or an authorised financial adviser of your choice.
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