Pensions might not be the most exciting or glamorous aspect of the financial world, but their importance cannot be overstated. Planning ahead and ensuring you have sufficient pension funds for retirement will not only provide peace of mind in the run up to retirement, but also ensure that you are able to live comfortably and without financial stress after you have retired. It is never too late to start contributing to a pension, but it is universally accepted that the earlier you start the better; not only are you more likely to have contributed more, but the funds will also have had more time to appreciate. In order to make smart, beneficial decisions concerning your retirement funds, it is important to know what is true and what is not when it comes to your pension.
I cannot exceed my lifetime allowance
As pension contributions tend to come out of your paycheck before tax, and so do not count as taxable income, they are a very tax efficient way of saving funds. Due to this tax efficiency, there is a restriction to how much you can contribute to your pension before you are subjected to penalties, known as a Lifetime Allowance (LTA). If your pension surpasses £1,073,100, you can be taxed 25% on any income and 55% on any lump sum you withdraw that exceeds the allowance amount. Whilst exceeding the allowance amount is costly and there are more tax efficient ways to secure your funds, it is not true that you cannot exceed the LTA.
A state pension will be sufficient
Most people in the UK are eligible to receive a state pension once they reach the state pension age (currently 66). The new full state pension is £179.60 per week, making an annual income of £9,339.20. Despite the increase announced in November 2021, it is still less than a third of the average working income in the UK. To retire comfortably, it is estimated you need around £30,000 a year, every year of your retirement, this means on average you need to have between £600,000 and £750,000 in your pension pot or savings depending on when you retire. Of course, it is possible to get by with the state pension alone, but it is really only enough to pay for necessities. If you still want to enjoy things such as holidays and going out to eat, it is imperative to bolster your state pension with a private one.
It’s too risky to transfer my pensions
A common misconception that may deter people from transferring their pensions is that it is too risky to have ‘all your eggs in once basket’. However, when transferring your pensions this is rarely the case. The majority of pension schemes will invest your pension in a diversified portfolio, meaning your pension pot is invested in a range of different industries and areas, reducing your risk. Transferring your pension makes it easier to keep track of your pensions and how much you have saved.
If a company goes under, I will lose my pension
If a company that you work for goes into administration or bankruptcy, this does not mean that you have lost your pension. The Pension Protection Fund is a public corporation set up by the government to support individuals whose pensions have been threatened by company bankruptcy. If you have a defined benefit or final salary pension with a company that has gone under, you can receive up to 100% compensation for your pension.
Whilst pensions are undoubtedly very important, people tend to think that organising and keeping track of their pensions is more complicated than it really is. By simply making note of policy ID numbers and dates of employment, tracing old pensions later on can be made far easier. If you would like advice or assistance transferring your pensions, contact us now to arrange a consultation.
This communication is based on our understanding of current legislation and practices which is subject to change and is not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity.