Pensions are a funny thing because although the idea is simple enough, the application seems unnecessarily complex.
The good news is that many of the complexities around pensions are often misunderstandings, untruths, or they come down to simply not knowing how a pension works. To help make planning for your retirement as easy as possible, we’ve busted 13 popular myths around pensions:
Myth #1: I don’t have a pension
One of the strangest things about pensions is that they can be set up for you by your employer. As this is generally done when you start a new job, it can be easy to lose track of the paperwork, handbooks, and other information you receive.
That said, if you are employed in the UK, are over 22, and earn at least £10,000 a year then you should have a workplace pension.
If you don’t tick those boxes but have been paying National Insurance (NI) contributions (or receiving NI credits) for at least 10 years, then you should qualify for the State Pension. However, whether or not you’ll receive the new full State Pension amount of £203.85 a week (as of the 2023/24 tax year) will depend on your NI record.
All this means that even if you haven’t actively set up a pension, you may still have one.
Myth #2: I can take money from my pension whenever I want
This is perhaps the first example of pensions not being particularly clear. Even the State Pension age varies from 66 to 68, depending on when you were born (if you’re unsure which applies to you, you can check your state pension age here).
Some people think they can withdraw their pension early – or even that they can take money out of a workplace or personal pension and treat it like a current account. But this is simply not the case.
As pensions are designed for your retirement, your money is typically locked away until you’re at least 55 when it comes to personal pensions (which you set up yourself) and workplace pensions (which are set up by your employer), although some providers may hold your money for even longer. And from 6th April 2028, the minimum age you can access the money in these types of pensions will go up to 57.1
Technically, you can access your money earlier than this through “pension unlocking” or “pension release”. However, the charges from your pension provider and the additional 55% tax from HMRC makes this financially unviable for most people.
For anyone asking, “when can I withdraw my pension?” the answer is currently 55 at the earliest, but it’s worth checking with your pension provider first.
Myth #3: Having everything in one place is unsafe
This myth does make sense. After all, it is the classic “don’t put all your eggs in one basket” approach. However, if you think of pensions like chickens instead of eggs, then you’ll have a better idea of how difficult it can be to keep track of everything. Chickens tend to wander off and do their own thing, so if you aren’t keeping an eye on them, you may just lose them.
And you won’t be alone either – more than 1.6 million pensions (not chickens) are estimated to be lost at the moment. By rounding up your pensions and keeping them all in one place, you can make it a bit easier to keep track of them. And, you never know, you may just be able to reduce your costs as well by only paying one set of fees!
Myth #4: If you lose a pension, it’s gone forever
This myth is an excellent bit of scaremongering! While losing your pension isn’t ideal, it certainly isn’t the end of it – not by a long shot. If you’ve found yourself in this position, then we’ve put together a quick guide to finding lost pensions.
The important thing to note is that you’re not the first person to lose a pension, you won’t be the last, and with a little bit of digging, you will be able to find it again.
Myth #5: If your employer goes under your pension goes too
It’s easy to see how people might believe this, but again, this isn’t true.
Firstly, most companies these days have a defined contribution pension which is run by a pension provider. This provider is completely separate from your company and won’t be impacted if your employer goes bust.
So, what happens if your pension provider goes bust? In these instances, your pension may still be fine if your money is held with a custodian, but in the case where they cannot pay you, then you will be able to get some money back from the Financial Services Compensation Scheme. You should be able to do this as long as the pension was authorised by the Financial Conduct Authority.
If you were in a defined benefit pension scheme, then chances are you’ll be covered by the Pension Protection Fund.
Myth #6: There’s no incentive to save in a pension
Let’s be honest, we like things here and now. Waiting for 30, 20, 10 or even just 5 years can seem like a lifetime, so without an incentive why would you save into a pension?
Well, first things first. The government wants you to save for your future, which means both workplace and personal pensions are tax-efficient. This means that as of the current tax year, you can pay up to £60,000 into these types of pensions without paying tax on any of the earnings or profits your money makes. This amount is called your 'annual allowance'.
But how does free money sound? Good, right? In addition to the tax-free saving, the government also gives you tax relief on your pension contributions. So, if you pay £100 in, the government will add another £25 to your pension, making the total contribution worth £125 (if you're a basic rate tax payer).
Your £60,000 annual allowance includes all payments into your pension, including the tax relief top-up from the government, and any money your employer pays in – so it is actually £48,000 of your contributions, plus £12,000 tax relief.
Myth #7: You can’t have multiple pensions
Yes, you can. And you can even have several of the same types of pension! Whether or not you want them all is a different thing, but typically, when you start a new job, you’ll also get a new pension. And, as there are no limits to how many pension schemes you can belong to, how many you end up having is entirely up to you.
If at any point you think you’ve got too many (those pesky chicken pensions running around again) then you could always choose to transfer all your pensions all into one place.
Myth #8: Moving a pension is really complicated
Some people think that they need a financial advisor to get involved to move their pension. Nope.
Believe it or not, you can put in a request to move your pension in just a few minutes. All you need to know is who your pension provider is, your policy number, and a few personal details. Most of the time, your new provider will do absolutely everything else for you – putting in the transfer request, moving your money, and combining your pensions.
It’s a lot less hassle than you might think! That said, some providers do charge exit fees, so you may want to quickly check if that’s the case before making a move.
Myth #9: Pensions are the same as saving
Actually, pensions are more like investing than saving. You see, most (if not all) pensions choose to invest your money rather than put it in a savings account. Doing this helps to give your money more potential, ideally allowing it to build faster and beat inflation.
Of course, there is an element of risk when investing, which means you may not get back as much as you put in. That said, by investing over a longer time – as you would with a pension – the odds are more in your favour. Want the figures to prove it? If you’d invested in a fund tracking the FTSE-100 (which holds the UK’s 100 largest listed companies) for any 10-year stint between 1986 and 2021, you’d have had an 89% chance of making a profit.2
Myth #10: You’ll be fine on the state pension
Could you live off £203.85 a week? The State Pension is a great thing, and it helps to support millions of elderly people across the UK. And while it may help to pay some of the bills, it may not allow you to live at the standard you’ve gotten used to. In addition to all this, there’s also a chance that the state pension may not be around when you retire.3
If this does happen, you’ll need a second source of income to help see you through retirement, which could be achieved through a workplace pension or a personal pension.
Myth #11: You need at least £1million to have a comfortable retirement
Despite some very scary “back of a napkin” type maths from anonymous strangers on the internet, this really isn’t true. According to the Retirement Living Standards (set out by The Pension and Lifetime Savings Association, or PLSA as they're also known), a single person living outside of London would be more likely to need around £23,300 a year for a 'moderate' retirement.
This includes things like spending £74 a week on your food shop, having a 3-year-old car that is replaced every 10 years, and having a 2 week holiday in Europe and a long weekend in the UK each year.
We’ve actually done a whole blog on what a good pension pot is if you’re interested. If you just want a sigh of relief that you don’t need to save £1million, then sigh away!
Myth #12: You can’t have a pension if you’re not working
Finally, a myth with some truth! You can’t pay into a workplace pension if you’re not working, and if you aren’t paying NI Contributions or receiving NI credits, then you won’t get a state pension either. But that doesn’t have to be the end of it.
If you still want to save for your future, then you could open a personal pension. You can choose from a huge range of providers – some which let you pick your investments, others with entire teams dedicated to that task. The beauty of a personal pension is that it’s your choice – you pick who you want a pension with and how much you want to pay in.
No job? No problem, as long as you can prove some form of income and are happy to answer a few suitability questions.
Myth #13: You never really know how much is in your pension
With traditional pensions, this myth is more or less true. There’s no dashboard to look at, and instead, you get an annual letter with a lot of information on it. This can make it very tricky to find out how much is in your pension, but it isn’t impossible.
If you do want more transparency, then you could move your pensions to Wealthify. We have an interactive dashboard that lets you see exactly how much money is in your pension, where that money is invested, and how your investments are performing. You could also choose to move all your pensions to one place, or simply open a brand new one.
The choice of how you save for your future is completely yours. We’re just here to help make it easier.
- Data from Bloomberg
With investing, your capital is at risk, so the value of your investments can go down as well as up, which means you could get back less than you initially invested.
Wealthify does not offer financial advice. Seek financial advice if you are unsure about investing.