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5 common pension misconceptions that could be costing you money

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Lauren Geall
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5 common pension misconceptions that could be costing you money

We all know how important it is to save for the future – but many of us are still pretty clueless when it comes to investing in our pension. We asked an expert to debunk some of the most common pensions myths to help us all better manage our money.

We all know pensions aren’t the most exciting of topics – but that doesn’t make them any less important.

With all of the jargon, rules and regulations that come with saving for retirement, it can often feel easier to bury our heads in the sand and put off ‘proper saving’ until later in life. But that needs to change.

Why? Because, according to a report published at the beginning of the year by NOW Pensions and the Pensions Policy Institute, on average, a woman’s pension wealth is less than a third of a man’s when they reach retirement age – meaning we could be missing out on £106,000 of pension in our pockets.

With this in mind, it’s more important than ever that we start thinking about our futures and investing in our retirement – and to do that, we need to educate ourselves about the complexities of pension savings and the misconceptions that continue to cloud the conversation.

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To find out more about pensions – and get the facts straight when it comes to saving for our retirement – Stylist asked Clare Francis, director of saving and investments at Barclays, to debunk five of today’s most common pension myths. Here’s what she had to say. 

“The government will provide for me when I retire”

A pot of pennies
Pension myths debunked: although the government does provide a state pension, it probably won't be enough to afford all the luxuries you currently enjoy.

A State Pension is available for anyone who has been paying National Insurance for at least 10 years and reaches the State Pension age, but if you hope to enjoy a comfortable retirement, it probably won’t be enough.

“If you’re relying on the State Pension to fund your retirement, you might be in for a shock,” Francis says. “The full basic State Pension is currently £175.20 a week, which won’t go far if you’re having to pay for everything out of it along with life’s little luxuries.”

She continues: “As there’s no guarantee what will happen to our State Pensions in the future, it’s important to start making your own retirement provisions sooner rather than later.”

“I’m too young to think about my retirement”

Although burying your head in the sand and putting retirement saving to the side for a couple of years may feel like the easier option, getting started earlier on makes it easier to save a bigger amount of money in the long run.

“Whilst planning for retirement may not feel like a priority right now, particularly if it’s decades away, the earlier you start putting money away, the easier it will be to achieve the standard of life in retirement you’re hoping for,” Francis explains.

“When working out how much you should be contributing to your pension annually, it’s often suggested that you should take that age at which you’re starting to save, halve it, and aim to put away this percentage of your income each year.”

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She continues: “If you don’t have access to a company pension, maybe you’re self-employed, or want to take more control over how your money is invested for your retirement, you could open a self-invested personal pension (SIPP).

“I’m too old to start saving”

If you’ve been putting off saving for a pension and are worried about your lack of savings, it’s important to remember it’s never too late to start taking action.

“Don’t beat yourself up if you didn’t start saving for retirement in your 20s or 30s,” Francis says. “It’s never too late to start – being proactive and saving something is better than using your age as an excuse to do nothing. You’ll be thankful later in life.”

“A pension is the only way to save for the future”

Pension myths debunked: paying into a pension is just one way you can save for the future.
Pension myths debunked: paying into a pension is just one way you can save for the future.

Alongside your traditional pension, there are other ways you can boost your savings and put away some money for a rainy day.

“Pensions are designed to help people invest for their retirement and, better yet, it’s a tax-efficient way of doing so,” Francis explains. “The government offers tax relief at the basic rate of 20% on contributions made to personal and workplace pensions. So for every £80 you pay in, the government will top it up to £100. If you’re a higher or additional rate taxpayer, you can claim back up to an additional 20% or 25% through your self-assessment tax return.

“However, one potential downside is that you can’t access any money in a pension until you’re 55, which is increasing to 57 in 2028. Current circumstances have left people cautious about the amount they invest in their pension, in case their financial situation changes.”

She continues: “The good news is, you don’t have to rely solely on pensions to fund retirement. ISAs (individual savings accounts) are another good option and you can put up to £20,000 in an ISA in the current tax year. Any returns you make on money invested within an ISA are tax-free, making them another efficient way of saving for the future. 

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“And one advantage ISAs have over pensions is that you can access your money if you need to, meaning they can be a good alternative if you’re nervous about tying it up until you’re in your 50s. Of course, if it’s money you’re investing for your retirement, you should try and resist the temptation to dip into it.

“If you’re under the age of 40, you also have the option of a Lifetime ISA (LISA). You can invest up to £4,000 a year (this forms part of your overall £20,000 ISA allowance) and you’ll receive a 25% bonus from the government until the age of 50, up to a maximum of £1,000 a year.

“There is a catch though – the money in a LISA must be used for retirement or put towards your first home. If you’re going for the retirement option, you won’t be able to access the money until you’re 60. If you need it sooner, you’ll lose the government bonus and will have to pay a 5% charge.”

“I’ve got a company pension so I’m all sorted”

Thanks to auto-enrolment, you’re now all automatically enrolled in your company’s pension scheme if you’re over the age of 22 and earn more than £10,000 a year – but that doesn’t mean you can’t look into your pension options and consider saving more if possible.

“Auto-enrolment has resulted in a significant increase in the number of people with pensions, which is great, but that doesn’t mean we should forget about any alternative pension supplements,” Francis explains. 

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“While both you and your employer will make contributions to your pension, it is unlikely it will be enough on its own to provide the level of income required for your retirement hopes and dreams.”

She adds: “An online retirement calculator is a good way of getting an indication of the income you’re likely to receive based on your current saving levels.”

It’s important to note that tax rules may change in the future and their effects on you will depend on your individual circumstances. 

Speak to a Financial Conduct Authority registered financial adviser before taking financial advice, and think carefully before making any decision.

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