Tackling the myths holding back your pension planning
There are so many myths that can make it really hard for people to plan with confidence. They risk getting in the way of people building up a good pension and they need to be tackled.
Here’s some of the more common ones:
1. The state will provide for me – I don’t need a pension
This is a common one which could leave people facing a nasty shock.
As it currently stands, the full new state pension is just £203.85 per week — around £10,600 per year.
Even if you reach retirement having paid off your mortgage you are still likely to find yourself well short of the lifestyle you want in retirement unless you build up savings elsewhere.
2. I will never be able to save enough for a decent retirement
We see lots of different figures published showing what people need to save for retirement. They all look mindbogglingly big, but it’s worth remembering that if you contribute to a pension then you will get a top up from the government known as tax relief.
If you are a basic rate taxpayer, then for every £80 you pay in then government will top it up to £100. If you are a higher or additional rate taxpayer, then you only need to contribute £60 and £55 respectively to get the same effect (there are different tax rates in Scotland).
Read more: Five steps to boost your pension prospects in 2024
In addition, if you are an employee with a workplace pension then your employer will also make a contribution alongside your own so you may find there’s a lot more going into your pension than you first thought.
Add this to the long-term growth you can get from being invested in the markets and you could end up with more in your pension than you thought.
3. I’m too young to start contributing to a pension
Retirement may feel like a very long way away, but it is exactly the drip feed of contributions into a pension combined with long term investment returns that will help you build up a decent pension.
According to Hargreaves Lansdown’s pension calculator a 22-year-old earning £25,000 per year and contributing 8% to their pension would have around £155,000 by the time they are 68. Someone starting ten years later in the same circumstances would find their pension closer to £110,000.
Keeping an eye on your pensions periodically means you can check to see if you are on track to meet your goals and give yourself time to make the necessary adjustments.
4. I’ve left it too late
The fear factor people have about pensions can lead them to believe they’ve left it too late and make them hesitant to engage.
However, it is never too late to make a difference.
Read more: Why you may be missing out on pension money
According to the pensions calculator, a 40-year-old earning £35,000 and contributing 8% to their pension every year could have around £107,000 in their pension when they hit state pension age. If they were to boost their contributions by £100 per month it would be more like £150,000 — so you can always take steps towards a better retirement.
5. I don’t need to increase my contributions; the default is enough
Currently auto-enrolment minimum contributions are set at 8% (5% employee, 3% employer).
This is a great start, but the reality is you need to save more if you want a decent income in retirement.
It’s a good idea to revisit your contributions whenever you get a pay rise or new job to see if you can boost your contributions accordingly. You may also find that your employer is willing to boost their contribution if you increase yours. This is known as an employer match and can lead to a significant increase in your contributions so it’s well worth checking to see if they offer this.
6. My property is my pension
Stellar house price growth in recent years has led many people to think they can plug any gaps in their retirement income by selling up and downsizing.
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However, it’s well worth saying that the downsizing dream many not be all its cracked up to be.
Buying and selling property can be expensive and you may find you have to opt for a much smaller property than you thought.
Many people also find that once they retire, they don’t want to leave the family home as they are too attached to it and want to remain close to their family and friends.
