Last Updated on October 18, 2022 by Melissa S.
Although pensions may appear complex, to begin with, they are relatively straightforward. You save money each month, it gets invested, and you end up with a substantial nest egg when you retire.
Of course, there is a bit more to pensions than that, and it is in the details where many people get confused. Such confusion can lead to myths growing around certain aspects of pensions.
People’s general complacency and lack of time for investigating such myths often lead to them spreading and being taken as fact. However, believing some of these pension myths could jeopardise your finances for retirement. Therefore, read on to discover the truth about five common pension myths.
Myth 1. You can’t access your pension before you retire.
You might think this myth is based on truth. Indeed, it would certainly seem reasonable as the purpose of a pension is to provide an income during your retirement. However, it is not entirely true, and here is why.
In 2015, pension Freedoms Regulations were introduced. These changes around how people access their pension funds mean you can now take your money from age 55, depending on your pension plan.
Of course, taking money out of your pension pot early may not be suitable for everyone. For instance, it may leave you short of income when you retire. Therefore, you should speak with a financial advisor to ensure you are making the right decision before accessing your funds early. Check out Portafina.
Myth 2. You don’t need help managing your pension.
As we mentioned earlier, the basic principle of pensions is straightforward. However, that does not mean you could not benefit from help managing your pension pot.
If you want to maximise your retirement funds, they will have to be invested wisely. An experienced financial professional can help you get the best returns on your investment. They will help you establish a suitable investment strategy, offsetting the risks of fluctuations and volatility in the markets.
Thinking you can manage your investments alone is dangerous. You are emotionally invested in your pension funds, which can lead to rash and irreversible decisions that could jeopardise your financial future.
Myth 3. The State Pension is the same for everyone.
Again, this myth has a bit of foundation to it. However, it’s not entirely true. You must have paid National Insurance contributions for 35 years to receive the full state pension benefit.
Although these years do not need to be consecutive, any gaps will reduce the amount of State Pension you receive on retirement. Therefore, it is worthwhile understanding what your State Pension entitlement will be. If you know how many gaps you have, you can take action to fill these to receive the full benefit.
Myth 4. When you die, your pension is worthless.
Having worked hard all your life and built up a substantial pension fund, it would be tragic if that money were lost before you could use it. Another benefit of the 2015 pension regulations was that they made passing your pension on to loved ones much easier. Today, you can be safe knowing that your pension contributions will not only provide for your retirement but can provide security for your family should the worst happen.
You should inform your pension provider of the people you want your pension funds to go to in the event of your death. Pension funds inherited by others are not treated the same way as other assets. There is not the same level of taxation, so most of your money will go to the ones you love.
Myth 5. Your old workplace pensions will continue to grow without contributions.
All employees older than 22 and earning at least £10,000 annually should be automatically enrolled in a workplace pension scheme. Such schemes are helping millions of workers prepare for their pensions.
Your employer also pays into your workplace pension. However, when you change jobs, your contributions and those of your employer cease. That means you could have accumulated several workplace pensions throughout your working life.
If you do not keep track of these pensions, they could become lost. Indeed, there is around £19.4 billion worth of lost pension funds in the UK alone. If your funds are part of this black hole, they could erode through a lack of contributions, high management charges, and underperformance.
Therefore, you should consider moving your pension funds when you change jobs. It may be better to have your money in a pension plan to which you are regularly contributing rather than leaving them in a dormant scheme. A regulated financial advisor can advise you on your best options in this situation.