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Understanding pensions: 6 myths debunked

Understanding pensions: 6 myths debunked
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Understanding pensions can seem overwhelming and confusing. We are here to help you break it down so it can make sense.

So let’s take a look at six of the most common pension myths around.

1. Transferring pensions into one pot is unsafe

The average Brit has 11 jobs in their lifetime. This can lead to a lot of different pension pots! Most will keep their pensions that way as they don’t want to put ‘all their eggs into one basket’.

However, combining your pensions into one may not be a bad idea. The way that pensions are invested and managed means that they are diversified. By this, I mean that your pension portfolio will most likely be invested in a combination of shares, property, bonds and cash. That way if any one investment is not performing well, the rest of the fund should counterbalance it.

So rather than thinking having lots of pension pots is the safer route, it is probably better to focus more on the fees pension providers are charging. If the transaction fees are high or if you are penalised for having frozen your pension, then that may not be the best place for your money.

2. Your State pension alone will be enough to support you

We would love to think that the state pension alone could fund our retirement, but that just isn’t the case. At £175.20 per week (2020/21), which works out at around £9,100 a year, the UK state pension is more of a top up to your existing pension pot.

To find out more about this, read our article on whether the UK State Pension is enough to retire on.

3. It is hard to calculate how much to contribute

Working out how much to save into your pension is usually the biggest blocker to people getting on and actually saving. When it comes to understanding pensions, you need to remember that planning for the future should not stretch your finances too much in the present.

There is a rule of thumb that to calculate your contributions you should divide your age by two. Whatever that percentage is, is what you should be contributing to your pension.

However, that may not necessarily fit with your current lifestyle and financial commitments. Instead, keep in mind that the earlier you start, the longer you have for your investments to grow. If you have a little extra cash each month, it’s no bad thing to top up your pension contributions.

4. Buying an annuity is the only option at retirement

The thinking used to be that when you retired, you converted your pension into an annuity. This would then provide you with a guaranteed income for the remainder of your life.

However, the introduction of the Pension Freedoms act in 2015 means that you can adopt a more flexible approach if you want to. There is now the opportunity to drawdown from your pension as and when you like.

Either way has its advantages and disadvantages, but it’s always nice to have options!

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5. You lose your pension when you die

When it comes to understanding pensions, one big myth is that you save and save and then nobody benefits from your pension when you die.

But in fact, any money left in your pension when you pass away can typically be passed on to your beneficiaries as part of your estate. This is usually free of inheritance tax.

Please note that tax treatment depends on the specific circumstances of the individual and may be subject to change in the future.

6. Your workplace pension will be enough

It may be the case that your contributions and your employer’s contributions will be enough to achieve the kind of retirement you want. But simply enrolling in your company pension scheme does not guarantee this.

Therefore, it could still make sense to seek some financial advice around your retirement strategy. If you need a little extra on top of your workplace pension, you could always set up a personal pension.

There are tons of online providers now, like Nutmeg and Wealthsimple, that make it easy to set up your own individual pension to save into.

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