James Appleby, Managing Director, Wealth Management at Tees Law talks to Phoenix FM about some popular myths about pensions.
It is never too late to start planning for retirement, but despite that, 35% of the adult population say they don’t have a pension.
In fact, one in six Britons who are within sight of their retirement still have no private pension savings and consequently are missing out on the opportunity to make their life after work more comfortable.
In addition, over half (55%) of people estimate that up to £100,000 is enough to retire comfortably on, whilst only 28% of people think they are on track to meet this.
From feeling confused by different types of pensions available to a mañana approach to finances, it’s worth understanding the benefits of pension savings as it could have a significant impact on the quality of your retirement.
Here, the Wealth management experts at Tees bust commonly-held pension myths and help guide you through the pension maze. Getting to grips with the basics is an ideal place to start.
What is a pension?
A pension is simply a type of long-term savings plan designed to help you save money for later life. Fundamentally, it allows you to save regularly during your working life to provide you with an income when you decide to retire or work fewer hours. The money contributed to your pension is usually invested, along with other pension savers’ cash, in some form of investment product. Pension contributions also benefit from particularly favourable tax treatment, which makes them more appealing than other types of long-term investment.
Myth 1: pensions are confusing
Not true. There are three major pension options: workplace; personal and state. It’s that easy. Most people fund their retirement through a combination of one, two or all three of these types. Here they are, explained:
- Workplace pensions
If you are in employment, these are arranged for you by your employer and are sometimes called company pensions or occupational pension schemes. A percentage of your salary is automatically deducted and, in most cases, the amount you pay is then topped up by a contribution from your employer, as well as tax relief from the government. Changes in 2012 have resulted in companies providing the vast majority of their staff with a workplace pension.
- Personal pensions
These are pensions which you arrange yourself, if you are self-employed, for example, or you want more than just a workplace pension on your retirement. The money you pay into a personal pension is put into investments, such as shares, by the provider.
The money you’ll get from a personal pension usually depends on how much has been paid in, how the fund’s investments have performed (they can go up or down) and how you decide to take your money.
There are different types of personal pension, the benefits of which you can discuss with an expert to see what is best for you. You can either make regular or individual lump sum payments into a personal pension and you’ll be sent annual statements, telling you how much your fund is worth.
You usually get tax relief on money you pay into a personal pension. Check with your provider that your pension scheme is registered with HM Revenue and Customs.
- State pensions
You can claim this when you reach stage pension age which, as of April 2021, is 66 for both men and women. State pension currently stands at £175.20 per week. Entitlement is built up by either paying or being credited with National Insurance contributions during your working life.
You’ll usually need at least 10 qualifying years on your National Insurance record to get any state pension. They do not have to be 10 qualifying years in a row.
Myth 2: the tax man takes all of your pension
Whatever type of pension plan you hold, you get tax relief at the highest rate of Income Tax you pay on all contributions you make, subject to annual and lifetime allowances.
You receive relief at source if you pay money into your personal pension yourself meaning you automatically receive 20% tax back from government in the form of an additional deposit into your pension pot. If your workplace pension contributions are taken directly from your pay packet, they are paid gross of tax into your pension.
So, for instance, in both circumstances, if you are a basic-rate taxpayer investing £800 of your take-home pay into your pension, the tax relief would amount to £200; effectively the taxman tops up your £800 contribution to £1,000.
If you do not earn enough to pay Income Tax at all, you still qualify for tax relief up to a certain amount. The maximum annual contribution you can currently make is £2,880 which, along with tax relief, would amount to £3,600 a year being paid into your pension scheme.
Myth 3: you can only pay a certain amount into your pension?
False. You can contribute as much as you like. There is, however, a limit on the amount of tax relief you are able to claim each year. For 2020-21, this annual allowance is £40,000 or 100% of your earnings, whichever is lower. However, once you have used up the current year’s annual allowance, if you have unused allowances from the past three years, you can use these, by carrying them forward, provided you were a pension scheme member during those years and your total contribution does not exceed 100% of your current year’s earnings.
A Tapered Annual Allowance was introduced in 2016-17, in an attempt to control the cost of pensions tax relief and to make sure pensions tax relief is fair and affordable. Currently, the allowance applies for individuals with ‘threshold income’ of over £200,000 and ‘adjusted income’ of over £240,000.
For those who have flexibly accessed their pension, under the new flexible pension rules, the Money Purchase Annual Allowance (MPAA) applies, which limits the amount of money which can be contributed to a money purchase scheme to £4,000pa, effective from 6th April 2017.
A Lifetime Allowance also places a limit on the amount you can hold across all your pension funds without having to pay extra tax when you withdraw money. This limit is currently £1,073,100.
Myth 4: I can’t access my money until I retire.
Again, that isn’t true. You can access your pension pot from the age of 55. In fact, pension freedoms introduced in 2015 allow you greater flexibility in how you can access your pension. It is your money and you’re free to take as much or as little as you like, whenever you like, after you turn 55. This greater flexibility gives more options, but these also need careful consideration.
Still feeling confused? We are here to make complicated matters simpler. If you need help with your pension, talk to us today
- It’s never too early – the sooner you begin, the longer your savings have to grow
- It’s better late than never – favourable tax treatment and opportunities for investment growth can still make a huge difference
- Don’t delay if you’re self-employed –you are responsible for your own pension provision
- Keep on track with regular reviews – to make sure you meet your retirement goals. Getting a State Pension Forecast will help your planning.
- Nominate beneficiaries – so that your pension wealth can be passed on in the event of death
- Take control of your retirement – consider the pros and cons of different options from age 55
- Most importantly, make sure you get good advice – it’s vital to get advice tailed to your own individual circumstances
How Tees can help
Our expert pension advisers will help you see the bigger picture and talk to you in plain language to help you understand your options.
They will start by finding out more about important factors such as your attitude to risk, investment perspective and tax position. Understanding your relationship with your finances will help your adviser create a plan that encompasses what you want your money to accomplish for you and your family in the years ahead.
So, if you would like to discuss your pension options and retirement planning, do get in touch. We are only a phone call away. You can be sure that all our advice and recommendations will be focused on getting you the best possible result.