Pensions are something that everybody’s heard of, but not many people fully understand. Given the ability to live comfortably in retirement is so important, we thought it might be time to shed a bit of light on how pensions work, and bust some common pension myths.
In the latest of our mythbusting series, we’ll explore six of the most common myths about pensions, and the truth behind them.
1. I can get by with a state pension alone
The UK has a state pension that every person of retirement age in the UK will qualify for. However, that doesn’t mean you should rely on a state pension alone being enough to see you through your retirement.
First of all, the state pension level is currently £179.90 per week, or just over £9,000 per year. That’s less than three times less than the average UK salary of £29,600 per year. That may be enough for the essentials, but won’t allow you to live comfortably.
The other thing about the state pension is that it keeps changing. While the state pension age in the UK is currently 65, it’s expected to increase to 67 by 2028, and there are no guarantees that the pension age won’t increase further as the UK population gets older as a whole.
2. I’m too young to start saving for retirement
Similar to the above, the state pension age isn’t guaranteed. As medicine and technology advance, people are living longer. For people currently in their 20s and 30s, the state pension age may be around 70 by the time they reach retirement.
Not many people like the idea of working until they’re 70, but even if you have no plans to retire early, you’ll want to live as comfortably as possible when you do. That means starting early. If you don’t have an employee pension, try acting like you do, by putting away 5% of your monthly wage (or whatever you’re comfortable with).
Even if you do have an employee pension scheme, it never hurts to chip in extra. You could try matching your employer’s contribution if it’s more than your own, or paying in a lump sum if you come into some unexpected money. When the time comes to wind down your career, you’ll be glad you did.
3. I can’t afford to save towards my pension
Everybody’s financial situation is different, and depending on your job and lifestyle, you may feel that you can’t afford to put money towards your pension, especially if you’re young and retirement isn’t really on your radar right now.
The good news is, it’s never too late to start saving, and even small changes in your life can make a big difference when it comes to your savings pot.
If you’re 30 and you were to put aside £100 per month, for example, you’d have an extra £36,000 for your retirement by the time you hit 60. The key is to work out what you can afford, and to save little and often for an extended period of time.
4. Pensions are hard to manage
A lot of people think of pensions as an admin nightmare, from working out how much to contribute, to transferring money between pensions pots, to figuring out when you’re able to access your savings.
In reality, a lot of these tasks are managed for you. If you enrol in a company pension scheme with your employer, your payments will be taken from your wage slip each month and, depending on the details of your pension, your company will automatically make their own contribution to your pension pot.
Even if you’re managing a pension on your own, there are useful tools to make your life easier, like a pension calculator. It will take information like your age and salary, as well as your savings goal, and let you know how much you should be saving, and for how long, in order to be able to retire in comfort.
5. I could lose my company pension if my company goes under
Many people are understandably concerned by the idea that if they sign up for a pension with their employer, and their employer then goes bust, they will lose everything they have been saving towards.
The good news is, measures are put in place to protect your pension should your employer find itself in financial difficulty. First off, even though you may sign up for a pension through your employer, they are usually managed by an independent pension provider.
These pension providers are not tied to your employer in any way. That means, even if your employer enters administration, your money will be fine – although you will obviously no longer enjoy an employer contribution.
Even if your pension is managed by your company, you should be protected by the Pension Protection Fund, a Government-led organisation whose role it is to compensate people if they’re employers can’t meet their pension commitments.
6. Your pension stops when you die
This is one of the biggest myths about pensions – that your pension will pay out for the rest of your life, but once you pass away, your pension will be stopped.
That’s not how pensions work. Pensions usually sit outside your estate, which means that when you die, whoever is a beneficiary of your estate should be able to access the money without having to pay inheritance tax on it.
In practice, that means if your partner or children are listed as beneficiaries of your estate, they should be able to make use of your pension payments when you pass away.
