5 pension myths you need to ignore or they could ruin your retirement
It seems like there will always be time to fix your pension later, but one wrong belief can force you into a retirement you never chose.
Pensions can seem baffling at times, and that confusion can prove costly. People regularly lose track of old pots, underestimate how much income they’ll need, or make rash decisions that leave them worse off later in life.
Antonia Medlicott, founder and managing director of financial education specialists Investing Insiders, has named five costly pension myths and said: “This could lead Britons to miss out on benefits, extra cash or parts of their pension altogether.”
Myth 1. My old employer no longer exists, so I've lost my pension.
Many worry that an old pension has vanished because a former employer went bust, but Medlicott said this shouldn’t happen. “You can be safe in the knowledge that your pension should be protected.”
Defined contribution pensions, the type invested in the stock market, are managed by external pension providers, not employers themselves.
Defined benefit ‘final salary’ schemes are generally protected too. “The Pension Protection Fund will compensate you for 100% of your pension if you’ve reached your scheme’s retirement age, or 90% if below.”
Myth 2. I'm too young to start thinking about my pension.
Another dangerous myth is that younger workers can safely ignore pensions until later life. “Getting started on your pension as soon as possible is a great way to set yourself up for a good retirement,” Medlicott said
Even relatively modest contributions made early can snowball over the decades. Younger savers who wait too long may later struggle to catch up.
Medlicott suggested joining a workplace auto-enrolment scheme as soon as you possibly can, to benefit from tax relief and employers’ contributions, as well as investment growth.
Myth 3. Consolidating my pensions is too difficult.
Many workers build up multiple pensions over the years but bringing them all together could make them easier and cheaper to manage.
Many are deterred by fears of paperwork and form filling, but Medlicott said the process has been massively streamlined. “Use the government Pension Tracing Service to track down your old pensions, and a pension consolidation service to organise them into one pot.”
Make sure you do not lose any benefits on your existing plan, such as guaranteed annuity rates or inflation protection. Watch out for exit charges too. Consider taking financial advice.
Myth 4. The state pension will be enough to live off.
The full new state pension is now £12,547.60 a year. That's barely enough to cover your basic needs, let alone any of life's little luxuries.
Medlicott said a moderate retirement lifestyle would require roughly £31,700 for a single person or £43,900 for a couple. That makes it vital to build pension and other retirement savings on top.
Myth 5. It's best to use my tax-free lump sum straight away.
The ability to take 25% of your pension free of tax is attractive, but taking it all at once can backfire, Medlicott warned. “This immediately lowers the value of your overall pot and means all further withdrawals will be subject to tax.”
It can make sense to use the tax-free cash to clear outstanding debts, but thereafter tread carefully and retain some for emergencies. "That way if you need a sudden injection of extra cash, you can take the full amount, rather than losing at least 20% of it to tax.”
