Planning for later life isn’t easy, especially when there are so many misconceptions surrounding it. On the surface, myths about retirement planning and pensions may look harmless, but in reality, they could end up impacting your golden years. So, to help you take control of your later life, we’ve compiled and debunked five of the most common retirement myths.
‘I’m too young to start saving for retirement’
If you’re in your 20s, retirement may not be your priority – after all, it’s so far away and you’ve surely got other financial matters to deal with. However, it could pay off to start planning sooner rather than later, and there’s a few things you could start with. Firstly, you could try to get your finances in shape. Focus on limiting your spending and creating an emergency fund for unplanned expenses. Secondly, once you’re in a good place financially, start having a look at the different retirement options you’ve got and make sure you’re making the most of them. For instance, double check you’re paying your national insurance contributions, so you can claim your state pension. If you’re employed, it could be worth paying into your workplace pension. Since April 2019, you must contribute at least 5% of your salary, and your employer will top up by paying a minimum of 3% of the amount you’re getting paid. If you’ve had many jobs and contributed to different workplace pensions, it could be a good idea to locate where they are and consider consolidating them into one scheme.
‘I’m too old to plan for retirement’
It’s never too late to plan for your later life. If you’re in your 40s or 50s, and haven’t started saving for retirement, don’t worry, you’re not a lost cause. You can still take control of your later life. So, what do you have to do? Well, there’s no hard rule, but if you want to make the most of your golden years, it could be a good idea to start checking your State Pension and see if you’ve met the minimum contributions. And, if you’re employed, make sure you opt back in your workplace pension and consider increasing your contributions – it could help you catch up.
Also, assuming you’re in a relatively good place financially, you could look at other options to boost your retirement pot. For instance, you could consider paying into a personal pension. With a personal pension, also known as SIPP (Self-Invested Personal Pension), you can invest as much as you want, but the amount you get tax relief on is limited to £40,000 (or 100% of your earnings if they’re lower)– this pension allowance is the combined contributions made by you and the government. In other words, you will get at least a 25% top up from tax relief. So, for every £100 investment, you’ll only need to pay in £80 as the government will add the remaining £20. The top up increases if you’re a higher or an additional rate taxpayer– one thing to keep in mind though is that you’ll need to contact HMRC to claim the extra top up. If you have more than £40,000 in your SIPP, you may need to pay tax on the excess. On the other hand, if you haven’t used your full pension annual allowance from the three previous years, you may be able to carry it forward and use it in the current tax year, as long as you have earnings that are at least equal to the total amount of your contributions. Also, to be able to carry your allowance forward you must be a member of a registered pension scheme.
With a SIPP, your money is locked in until you turn 55 (though this will change to 6th April 2028), but you can keep paying into your account until your 75th birthday. Once you reach the age of 55, you’ll be able to withdraw up to 25% of your money as a tax-free lump sum.
‘My expenses will be cut in half’
Many people think that their expenses will drop when they retire, but it’s not always true. Whilst your mortgage payment and commuting costs may disappear, other expenses, such as travel, leisure activities, and health care may increase, and you could be spending as much as you used to during your working life. So, it’s important to start planning early and consider putting aside as much as you can if you want to spend your golden years without worrying about money.
‘I’ll just put money in a savings account’
Putting money in a savings account may not be the best option to build the retirement of your dreams. In fact, it could potentially undermine your later life. When you save for retirement, you typically have to think long-term, since it could take about 40 years before you wave goodbye to your working life. And in the long run, saving cash is unlikely to help. When you put money in a savings account, you typically receive a fixed interest, on top of your deposit(s). Put simply, when you save money, you’re guaranteed to get back what you initially saved, plus a little extra. However, this doesn’t consider the impact of inflation on your savings. We talk about inflation when goods and services become more expensive. This rise in prices will limit the number of products and services you can afford, especially if your earnings aren’t increasing as fast, but it can also erode the value of your savings. How? Well, if the interest rate you get from your bank is lower than the rate of inflation, your savings will be worth less than they were previously. So, if you’re planning for retirement, it could be a good idea to consider investing. With investing, your returns aren’t tied to any fixed interest rate, meaning there’s a risk you could get less than originally invested. But it also means that there’s a chance you could get inflation-beating returns.
Investing for your retirement isn’t as hard as you might imagine. With digital investing platforms, like Wealthify, you can open a personal pension in just a few taps. With our Wealthify Pension, all you need to do is choose how much you want to invest and the risk level that suits you. We do the rest, from building your pension to adjusting it when needed to keep it on track. Also, every time you add money to your pension, we’ll automatically add the government’s top up to your pot and invest it for you.
‘The government will take care of me’
Many people think that the State Pension will be enough when they retire, but as it stands today, you wouldn’t even be able to afford basic expenses with it. The Retirement Living Standards from the Pension and Lifetime Savings Association (PLSA), you’d need at least £10,900 a year as a minimum, as a single person1. And yet, if you’re eligible for the full State Pension, you can expect to get £9,627.80 a year2 – not enough to cover your expenses during retirement. So, it’s important not to rely exclusively on the government if you want to retire comfortably and look into other pension options. Make sure you contribute to your workplace pension and consider opening a personal pension, or SIPP, to maximise your retirement pot.
Whether you’re at the beginning, middle, or end of your pension journey, our pension calculator can help you understand what your finances could be like in retirement.
The tax treatment depends on your individual circumstances and may be subject to change in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.