Debunking common pension and later life myths

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    With the ever-changing political landscape and new pension products being introduced over time, it can be difficult to divide fact from fiction when it comes to pensions.

    If you’re planning for your later life financing, it’s likely that you have read a significant amount of information on pensions – but how much of it is true? Here are some common myths that you may have encountered, with guidance on how to find the right information for you.

    Myth #1: You need a certain amount saved before you can think of retiring
    This myth stipulates that you need an arbitrary amount saved before you can think about retirement. In reality, the amount you should focus on saving for your pension should be able to cover the costs of your planned retirement lifestyle, and your expected expenses during your later life. This is likely to vary from person to person, and as such, the amount you should focus on saving is specific to you and your needs.

    Myth #2: All you need to do to fund your later life is to invest in property
    Though property can be a worthwhile investment for supporting you in your later life, it is not always the most cost-effective way of sponsoring your retirement. Whilst owning property and renting it out might potentially be a suitable way of funding your retirement, it could come with several associated costs. Property is often subject to a range of tax costs, including inheritance tax, capital gains tax, and income tax.

    Pensions have the benefit of tax relief, with a lump sum withdrawal of 25% of your pension pot being tax-free. This could be a preferable option for funding your later life, rather than risking high property tax costs.

    Myth #3: My pension pot is lost when I pass
    If you choose to appoint a beneficiary, as many pension schemes will allow you to do, your pension savings will not be lost upon your passing. Whilst there are specific schemes that do not allow you to appoint beneficiaries, most schemes will allow an appointed person to continue to benefit from your pension.

    In terms of taxes, generally speaking, if a person passes under the age of 75, their inheritors are not taxed on the remaining funding that they receive. If this occurs with the benefactor being over the age of 75, the recipients will likely pay income tax on the money they receive as their inheritance. There can be variations on this general rule, however, and consulting the Money Advice Service can help you understand more about the regulation involved.

    Find out more about the how pensions are passed on with the Money Advice Service

    Myth #4: If the employer providing my pension goes under, I lose out on my pension
    Despite the recent headlines about pensions being lost by companies going under, there are protections in place to make sure your hard-earned money is not lost.

    Your pension money, if it is paid into a pot by your employer, is likely to be held by a third party, such as a pension provider, in your name. Should the worst happen to your employer, your money will be kept safe, as it is separate from your employer’s capital. It could be worth checking to see if your pension is held in a pot protected by the Financial Services Compensation Scheme (FSCS) for further protection.

    You might have a pension that is part of a ‘defined benefit’ scheme, in which you are paid an amount based on your final salary or your career average when you retire. This pension type is covered by the Pension Protection Fund, which should cover any money you are owed if your employer goes into administration.

    Find out more about the Pension Protection Fund

    Myth #5: You shouldn’t retire until your mortgage is entirely paid off
    If you’re thinking about your later life planning, you might be worried about taking any debt into your retirement. Whilst carrying less debt could be advantageous, you don’t necessarily need to have paid off your mortgage in its entirety before you retire. If your mortgage repayments seem manageable for your retirement budget, and you have a low rate of interest, you may wish to retire before your mortgage is paid off in full. You could also pay off part or the entirety of your mortgage with a lump sum from your pension. A financial planner could help you to ensure that your mortgage repayment fits into your retirement plans.

    Find out more about pension myths 

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