Pensions are not complicated, but the rules about retirement savings can make them far from straightforward.
The principle is to save as much as possible while working to pay the bills in your later years.
With such a simple plan, what could go wrong?
Some people find pensions confusing and regularly come up with reasons why not to save for retirement.
Here, Money International looks at these common pension myths and explains the truth about saving for retirement.
Table of contents
- Pension Saving Goalposts Keep Moving
- Merging Pensions Can Make Managing Money Easier
- Working Out How Much To Save
- Follow The Advice Of Billionaire Investors
- Flexible Access Is An Open Door
- Spending Your Pension Before You Die
- Offshore Pensions For Expats Are Not Scams
- Pension Saving FAQ
- Related Articles, Guides and Insights
- Questions or Comments?
Pension Saving Goalposts Keep Moving
Successive governments seem unable to resist changing pension rules – from minor tweaks to massive system overhauls.
Ordinary savers can find this rule changes a challenge, but the current pension system is streamlined compared with years past and offers clear pathways to saving and withdrawing money.
There are two things to remember about pensions:
- The more income tax you pay, the more tax relief you can claim against your savings. If you have £10,000 in your pension pot, the cost to you can be as little as £5,500, and no other investment offers such a return
- If you drive a car, you don’t have to know how everything under the bonnet works. Pensions are the same. You only need an overview rather than a deep knowledge of the technical aspects of how a pension boosts your retirement finances
Merging Pensions Can Make Managing Money Easier
Many savers find keeping track of their retirement money difficult because they have too many small pot pensions.
On average, people have 11 jobs over their lifetime and often forget how much they have saved with different schemes.
Consolidating pensions – moving them into a single scheme – makes keeping tabs on savings easier and can save money with reduced fund management and administration costs.
Working Out How Much To Save
You can never save too much for retirement, but it’s easy not to save enough.
After all, no one knows how long they live.
However, a third of retirees lament that they wish they had saved more – not because they were poor savers but because they didn’t know how much to salt away.
There’s no right or wrong answer to how much to save. However, one rule of thumb is to save an amount equivalent to half your age as a percentage of your earnings.
For example, someone aged 40 earning £36,000 a year should consider saving 20 per cent of their income, or £7,200 (£600 a month). Don’t forget tax relief can cut your contribution so that £600 a month for a basic rate taxpayer is £480 with the rest topped up by HM Revenue & Customs (HMRC).
If you can’t afford to set aside that much, you can still start saving at a more comfortable level. It’s better to save something rather than nothing. Many pension firms have a minimum £25 a month contribution level.
Follow The Advice Of Billionaire Investors
It’s only too easy to lose all your money on get-rich scams like hardwood plantations, hotel developments, storage pods and other weird and wonderful esoteric investments.
Avoid high-risk returns and bear in mind what billionaire investors like Warren Buffett advise. He has a £100 billion fortune and is one of the world’s richest men, so he knows a little about saving and investing.
Rather than fret over picking stocks, Buffett advocates tracker funds that move with the market and take the strain out of investing.
Pension fund management is a lucrative business, with plenty of pundits more than happy to take a slice of your action.
If you want to take control of your savings, there’s plenty of advice out there, but bear in mind most advisers are salespeople who stand to gain from your decision to invest with them.
Flexible Access Is An Open Door
Flexible access is about taking money from a pension once you reach 55 years old (57 from 2028).
Not all pensions follow flexible access rules. Millions of savers with public sector or civil service pensions cannot trigger flexible access. Length of service and salary on retirement determines how much a saver receives on retirement rather than how much they have saved over the years.
For the rest, pension freedoms mean they can mix and match from a menu of drawdown choices:
- Buying an annuity that gives a guaranteed income for life
- Taking cash lump sums as you need them
- Taking a regular pension payment
- Drawing your entire savings as cash
- Leaving the money invested
The key is taking what you need from the fund while leaving the rest invested to keep growing.
Spending Your Pension Before You Die
Many retirement savers believe they must spend their pension before they die, or the money is lost to the taxman.
This is not true. Any unspent pension cash can pass to your family or loved ones, often free of inheritance tax if you die before reaching 75. However, if you die aged 75 or over, your beneficiaries will pay tax on the money.
Offshore Pensions For Expats Are Not Scams
Retirement planning is often more difficult for expats who lose the tax benefits of UK pensions when they set up homes overseas.
The Qualifying Recognised Overseas Pension Scheme (QROPS) is a saving option that works like a UK self-invested personal pension (SIPP).
Since the scheme started in April 2006, 135,500 expats have switched UK pensions worth £12.35 billion for a QROPS.
Many QROPS have flexible access, offer DIY or managed funds and allow cash withdrawals from 55 years old.
Pension Saving FAQ
The minimum age is 18, but it’s never too late to start saving for retirement. Nevertheless, the longer you wait, the more you need to save in a short time. Generally, the rule is to save as much as you can from early in life because, potentially, your money can grow. Starting to save early also means if stock markets fall, your fund has time to make up for any losses.
A rule called the lifetime allowance limits your pension savings to £1.073 million. The amount is the total of your savings across all your pensions except the state pension. Any savings over this amount can trigger a tax penalty.
No, you don’t need to work, but your contribution level is restricted to £3,000 a year or £60 a week if you don’t have a job.
You do not have to join your employer’s pension scheme, but generally, it’s a good idea because the employer contributes toward your retirement savings. Think of the money as extra pay to spend in retirement.
Don’t worry. A pension is a lifetime saving commitment, and over 40 years or so, your finances are bound to change. However, most pensions will let savers pause, stop or reduce monthly contributions if they need to without penalty.
The government runs three advice services that can help pension savers:
· The Money Advice Service — for guidance about money issues for all ages
· The Pensions Advisory Service — for pension guidance
· Pension Wise —for the over 55s considering taking money from their pension
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