Filtering through pages of information online regarding pensions can leave you feeling confused and unsure on where you stand, especially when things are constantly changing.

However, with the help of a financial advisor, you can soon understand what your pension options are, how to get started if you haven’t already and be able to formulate a realistic pension plan that is tailored to your personal needs.

But, in the meantime, take a read of this article where we highlight 8 misconceptions related to pensions:

EIGHT MISCONCEPTIONS OF PENSIONS

1. A State Pension Alone Will Fund Your Retirement

While the UK government does offer a state pension, it is unlikely that even if you received the full amount, that you would be able to live even modestly on it.

The new state pension currently pays £179.60 per week which equates to roughly £9,350 per year.

Some people may not qualify for the full new state pension amount as you currently need to have at least 35 years on your National Insurance record to qualify for the full entitlement.

A quick way to check your state pension entitlement is to go through the government website here.

2. Your Workplace Pension Is Enough to Fund Your Retirement

We’ve already written an article on this topic which you can read here, however, to summarise what we said there, the simplest answer is that for most people, a workplace pension will not be enough to fund a comfortable retirement.

However, there are many more savings options out there to explore and combine with a pension scheme (read our article here) to make sure you can achieve your retirement goals.

Your best port of call is to seek the guidance of a financial advisor who will be able to help you create a realistic retirement strategy that is tailored to your individual needs.

3. Only 25% of Your Pension Pot is Tax-Free

While this is commonly the case, some old-style pension schemes can occasionally offer you greater amounts of tax-free cash.

Unfortunately, though, some people with these policies aren’t aware of the fact that this is available to them.

You should always make sure to enquire about your pension benefits if you’re unaware of what they are as they may differ from the ‘standard’ ones offered.

If in doubt, always consult a financial advisor who will be able to clear up any confusion and make sure you don’t miss out on any valuable benefits!

4. Annuities Are Pointless

This is far from true. An annuity can be a valuable part of your retirement plan as it can provide you with a stable income to put towards things such as bills and other day-to-day costs.

An annuity is a fixed sum of money paid to someone each year, typically for the rest of their life.

However, they are hindered by limited flexibility and can have poor rates that you should be aware of.

5. You Can’t Exceed the Maximum Lifetime Pension Allowance

The current lifetime allowance for this tax year (2021/2022) is £1,073,100. However, this doesn’t mean that the savings in your pension account are limited to this amount; you may instead just have to face extra tax charges.

The amount of tax you pay will depend on how you withdraw the money. You can withdraw up to 55% of the excess amount if you take out a lump sum, or 25% if you withdraw it as an income.

Financial advisors can help you make a sensible plan to create the most tax-efficient strategy for you.

6. Your Retirement Savings Are Covered By a Default Lifestyle Fund

If you plan to retire at the normal retirement age (66), then this may be the case if you are looking to purchase an annuity.

However, if your retirement plan is more flexible (eg. semi-retirement), then you may want to look at the default fund your money is invested in.
This is because most default funds move your money into cash or bonds the closer that you get to retirement age and it isn’t as favourable for income drawdown.

Income Drawdown is a way of receiving your pension income when you retire while also allowing your funds to keep growing.

7. You Can’t Access Your Company Pension Before The Age of 65 Without Paying a Penalty

Sometimes this can be the case, but specific benefits may be worth paying the extra fees! For example, accessing some pension benefits earlier (like from a deferred benefit/’final salary’ scheme) may not necessarily be a bad thing as, despite it meaning you could receive lower pension payments, you may be able to get them for a longer period of time. It could also push you into a lower tax bracket or the benefits could fall beneath the lifetime allowance (fewer fees).

8. Your Pension Dies With You

Most pensions will allow you to leave your accumulated pension pot to a beneficiary and not just your partner if you have one. However, you may find that a defined benefit pension scheme will be limited to paying an income to your dependant.

If you do want to leave your pension to a beneficiary, then you should let your scheme provider know by completing an ‘Expression of Wishes’ form. On this, you can list as many beneficiaries as you like*.

*Be aware that the pension scheme trustees have the ultimate decision on who to assign your funds to.

It is also worth noting that if you die before the age of 75, most pension benefits will normally be passed on tax-free. However, if you decided to take out your tax-free lump sum and didn’t use it before you died then it will become part of your estate and therefore your beneficiaries may need to pay inheritance tax on it.

Final Thoughts

Pensions are not only essential for your retirement, but they can also provide great savings benefits. If you’re looking into creating a retirement plan or are in need of some pension guidance, contact one of our Financial Advisors today who will help you through the process.

Disclaimer: This article is an example and should not be used as a guide or to help pursue certain strategies.

The income and value of investments can fall (as well as rise) and you may get back less than what you put in. Applicable tax is also variable and depends on the circumstances of each client and is subject to change.

Coffey Brooks are a team of Independent Financial and Mortgage Advisers based in Clacton-On-Sea, Essex and are directly authorised and regulated by the Financial Conduct Authority.