Financial News Updates

Pension Myths

February 17th 2010

Myth no 1: ‘I can’t take it with me if I leave my job’

If you leave your current employment the fund you build up in your employer’s pension fund (money puurhase) is yours and you can transfer it into a personal pension …. so if your employer will contribute to a pension on your behalf, take it! This is a free pay rise. In order to save enough to provide a reasonable pension you will have to contribute 15% or more of your income throughout your working life. If your employer will help you meet the cost it’s not easy to think of a good reason not to take them up on it.

Myth no 2: ‘There’s plenty of time to start saving when I’m older’

If you won’t be retiring for many years, it’s dangerous to think you can easily catch up later. Every year matters - in fact even weeks of delay can make a difference. For example, a 25 year old who decides to put off saving for retirement until age 30 can expect to see their pension at 65 reduced by around 30%. That’s a 30% pay cut in retirement because of a 5 year delay.

Myth no 3: ‘My house is my pension’

There are two key problems with relying on property to fund your retirement: access to liquid funds ie cash and diversification of investment risk. If you are relying on your own home to provide you with a retirement income you will have to either sell your house and move out, or use equity release as a way of getting cash up front for a delayed sale later. There is no certainty over how easy it might be to access the cash or the price you will get. Investment theory tells us to spread our risk: don’t invest in just one asset class and certainly don’t invest in just one asset; yet relying on property, especially if it is your own home, means doing just that. The risk of disappointment is very high.

Myth no 4: ‘I can’t afford to take any risk’

There may be a temptation to stick to cautious, low risk funds out of an understandable concern to avoid investment losses but past performance shows in the longer term this is unlikely to be in your best interests. Readily realisable investments which don’t fall in value can’t take advantage of long term opportunities in the hope of producing higher returns because they are constrained by the need to always protect your original investment. The greater the investment risk you are willing to take, the greater the potential rewards in the long term. Although as you near retirement you should consider switching to lower risk investments such as gilts and bonds (known as fixed interest) and cash. This may shelter your pension fund from market volatility prior to retirement. There are funds available to suit all risk grades and your personal attitude to risk may vary, for example depending on how many years you have to reitrement – the biggest risk is doing nothing at all and and you should discuss yiur attitude to risk with your financial adviser.

Myth no 5: ‘I have saved for years so I’m bound to have a good pension income’

It’s no use getting to retirement age and realising that your pension pot isn’t big enough to provide you with a decent income. How often do you look at what your projecting pension income will be or how your investments are performing? You should be reviewing how much you are saving in your pension plan at least every year and considering what your projected income will be compared to your expected needs. For example, have you thought about when you will finish paying your mortgage off – is this after your expected retirment date? You should also be considering whether your investments still match your attitude to risk. Regular reviews are essential if you want to avoid unpleasant surprises.

Myth no 6: ‘I’ve got a pension so my partner doesn’t need to worry’

Do you even know whether your partner or spouse is saving into a pension? In retirement you get a more generous personal allowance; currently the first £9,490 of your income is tax free once you pass age 65. It therefore makes absolute sense for a couple to split their retirement funding between them so they are both making full use of this tax free allowance in retirement. In theory a couple could enjoy a tax free income of nearly £19,000 a year, if their income were evenly divided between them.

Even if your partner has no income, they can still invest up to £3,600 a year in a pension and because of tax relief, they only actually have to pay in £2,880, with the balance being paid by the government.

Myth no 7: ‘I’m better spreading the risk and having a number of pensions’

If you have more than one pension (and most of us do) then think about consolidating them into just one arrangement. Your financial adviser will check that you won’t be losing valuable guarantees or paying unnecessary penalties but you might also be paying high charges, especially on some of your older policies. Moving your pension plans into one policy means that you only have one administrator, one set of paperwork, one set of investment funds and one set of investment choices. It is extremely difficult to have a clear overview of your retirement plans if they’re spread across two or three or even more different arrangements. With the wide range of funds available within modern pensions or even SIPPs you can achieve a still achieve a spread of risk within a single contract)

Myth no 8: ‘When I retire, I have to take my pension from my current insurer’

Get help from an adviser and make sure you shop around at retirement. There are numerous options at retirement such as temporary annuities, investment linked annuities and drawdown as well as considering what sort of death benefits you want and whether you’re eligible for any kind of increase such as a postcode or enhanced annuity. This isn’t just about finding the company which will pay the most competitive rate of income for a given type of annuity although that is important, it is also about getting the right type of income. Shopping around could significantly increase your annuity income.

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