26th March 2015
Pensions have repeatedly hit the headlines over the last year with radical reforms announced in both the 2014 and 2015 Budgets.
Despite the improved awareness of pensions that has undoubtedly resulted from changes to the retirement market, many savers find pensions a confusing and complicated subject. Below, David Smith, financial planning director at Tilney Bestinvest dispels 10 of these most common ‘myths’ and reveals the reality…
Myth 1: You have to stop work and retire to draw on your pension
Wrong. As long as you are 55 or over, you may access your pension regardless of whether you decide to stop work. And with people enjoying improved health and longer lifestyles, continuing to perform some form of work, including part-time employment, can be a positive lifestyle choice as well a financial necessity alongside drawing pension benefits.
Myth 2: Your Will controls who will benefit from your pension on your death
This is a very common misconception; it’s actually a beneficiary nomination form that dictates who will benefit from your pension in the event of your death, although pension scheme trustees will often revert to the Will for guidance if no nomination has been made.
Myth 3: All of my pension fund is available as a tax-free cash lump sum
With the news that from the new tax year people will be free to entirely cash in their pension if they choose to, there is a serious concern that some may not understand the tax implications of making pension withdrawals. This is a very complex area, so professional advice should be sought, but as a rule of thumb; 25% of any withdrawal taken will typically be payable tax free with the other 75% being subject to income tax at your highest marginal rate. Even relatively small pension pots could therefore be, at least in part, subject to income tax rates of 40% or more and even a basic rate taxpayer cashing in the entirety of their pension pots could face the nasty surprise of an emergency tax rate.
Myth 4: My existing pension plan is ‘Pension Reform Ready’
This is not necessarily the case. In fact it’s unlikely to be the case. Although the legislation is changing, insurance companies are not being forced to apply the new rules across their pension contracts. This means that everyone facing retirement in the near future should be reviewing their pension now, as there is a high likelihood that existing pension contracts will not be adopting all, or possibly any, of the new Pensions rules.
Myth 5: I’ll be able to access my pension like a bank account through a ‘hole in the wall’ machine
This is highly unlikely as you will need a very clever cashpoint machine! The taxation of pension withdrawals (let alone the investment structure of the underlying plan) is complex to say the least, so it is very hard to envisage how withdrawals via cashpoints could ever become commonplace.
Myth 6: Annuities no longer exist
Oh yes they do. In fact, despite much comment to the contrary, annuities will remain a mainstay of the retirement income market as for many people the certainty of a guaranteed income for life will continue to be appropriate. Indeed, if at some point in the future we see long-term interest rates rise and therefore annuity rates rise, it’s not inconceivable that annuities could return to their former glory days. Also, watch out in the new tax year for some new innovative annuity plans that will take full advantage of the new Pensions Legislation.
Myth 7: Any liability to 55% tax for being in excess of the lifetime allowance is only assessed once (at the point pension benefits are first taken)
Not true. A potential charge for being in excess of the lifetime allowance can take place any time a “benefit crystallisation event” occurs. Further “benefit crystallisation” events at which a lifetime allowance charge could impact include death, remaining in drawdown at age 75 or purchasing an annuity.
Myth 8: Retirement is all about having a well-funded pension
Pensions without doubt are a key aspect, indeed the centre-piece, of a retirement plan but they may not be the complete solution. The amount of investments you might need to provide a sufficient income to maintain a comfortable lifestyle in retirement could be a lot more than you realise, particularly if you are used to maintaining a large home and enjoy regular holidays. For anyone aspiring to earn more than the UK average earnings (currently: £26,500) even a sizeable pension of £1 million will not be sufficient and therefore a comprehensive retirement plan should consider a much wider range of options than pensions alone.
Myth 9: Pension funds have opaque charges and high fees
While old-style pensions had confusing fund series with complicated commission structures built in, these days the fund choices available in pensions are as varied as you can find in Individual Savings Accounts, especially within Self-Invested Personal Pensions. These choices range from very low cost index-tracker funds through to higher fee active funds. The funds you would invest in today within a pension will no longer include the costs of commission.
Myth 10: SIPPs are for confident people who want to manage their own investments
No. A SIPP is simply a pension account that provides access to a wide range of investments from different fund managers. These will appeal to those who like to choose their own investments and ‘self-invest’, but for those who either don’t have the time or inclination to do this, there are plenty of options available including having a portfolio managed for them by a discretionary manager, receiving professional advice or investing in multi-asset funds.