Dealing with pension issues can be dull, and many avoid delving into them for this reason. However, the resulting knowledge gap can lead to myths emerging about pensions.
Unfortunately, if you believe some of these untruths, they can trash your pension plans. This article aims to clear up five common pension myths.
Myth 1. You Can’t Access Your Pension Funds Before Retirement.
Pensions are designed to provide an income during your retirement. Therefore, this myth may seem entirely credible at first. Indeed, before 2015, this was the case.
Today, many people can make money from their pension pots before they retire. That’s due to the introduction of Pension Freedoms, which enabled access to pension monies from age 55.
However, taking funds from your pension early may not be suitable as it could leave you struggling for income in later years. Therefore, you should seek professional financial advice before deciding on this aspect of your pension. Check out Portafina.
Myth 2. Pensions Require No Management.
Pensions are based on a fundamental principle; you save over the long term to provide an income for retirement. Although this may seem straightforward, it involves many components. Also, your plans and financial situation changes throughout your life, and your pension should reflect this. Therefore, professional financial advice regarding your pension can be crucial.
Most pension funds are invested in shares and the stock market, as this is where they will likely get maximum returns. However, stock markets are unpredictable and complex. Over time, they will see many up cycles and downturns. Without knowledge and an investment strategy, you could make an incorrect decision that could jeopardise your retirement funds. That’s why your pension needs careful management throughout its lifetime.
Myth 3. State Pension Payments are the Same For Everyone.
This myth holds true to a certain degree but is not wholly correct. The State Pension you receive depends on how many years you have made National Insurance (N.I.) contributions. You must have paid N.I. for 35 years to receive the maximum pension benefit.
However, if you have been out of work or self-employed, you may have contribution gaps. If you do not fill these gaps, you will not receive the maximum amount of your State Pension. It is crucial to understand how much pension you will receive, and you can do this through the gov.UK website.
Myth 4. Your Pension is Worthless When You Die.
Having saved throughout your working life, it would be unfortunate to lose that money before you could use it. Thanks to Pension Freedoms from 2015, it is now more straightforward to pass on pension funds to your loved ones should you die.
In this situation, you should make the pension provider aware of the person or people who should receive your funds. Pension funds inherited by your family are treated differently from other inheritances. Therefore, they are not liable to have high taxes levied upon them.
Myth 5. Your Pension Fund Will Grow Automatically.
If you meet the qualifying criteria, your employer is legally bound to provide a workplace pension scheme and automatically enrol you. Workplace pensions are assisting millions of people save for their retirement.
You are enrolled automatically, and all the administration is done for you. However, this doesn’t mean you can leave your pension alone and expect it to grow. If you move jobs, you will transfer to a different pension scheme. When you stop making contributions, losing track of your pension funds is easy.
If this happens to you, your money could become part of the UK’s £19.4 billion pension black hole. To avoid this, ensure you keep track of all pensions when changing jobs.
Also, you should check your pensions regularly to ensure you are not paying too much in management charges and your pension is performing as expected. Failure to do so could mean your funds remain stagnant or, worse, become eroded.
The misinformation around pensions can result in some failing to plan for the future. Hopefully, this article will have debunked five common myths surrounding pensions, inspiring you to start preparing for your retirement today.