You don’t have to look far to find some pretty negative comments about pensions. Any article in the mainstream press discussing pensions is usually followed by some very negative and often ill-informed comment about pensions; these are just a few we have found:
“Pension plans should come with a warning that contributors will probably not get back the money they invest because the rules are devised to benefit the pensions industry at the expense of pensioners” – Telegraph online 14th October 2012
“This is precisely why no one and I mean no one should invest in any form of pension. All pension investments drawn up under pension regulations are a scam, perpetrated by the government on those who are reckless enough to put money there.” – Telegraph online 11th October 2012
“Personal pensions are a waste of time now…with complicated rules and punitive charges and the mess made by the constant tinkering of dummy brown and his band of fools.” – Daily Mail 28th September 2012
We therefore thought we’d take a look at some of the more popular pension myths and try and dispel them once and for all.
1. “My pension has performed badly”
If the investments held in a pension don’t live up to expectations the natural reaction is to think: “my pension has done be badly”, but this really isn’t the case.
To explain why this is a myth, we need to separate down the pension wrapper and the investment.
Your pension is nothing more than a vehicle for the investments that you or your financial adviser chooses. The blame for poor performing investments, or indeed the credit if they have done well, should lie at the door of whoever is managing your investments, not with the pension vehicle.
After experiencing poor investment performance the reaction of many people is to blame the pension, and then categorise all pensions as ‘bad’. Whereas in reality, a pension is just a tax wrapper, or vehicle, for holding money, in the same way an ISA (individual savings account) is.
The same investment fund would perform in broadly the same way if it we held in an ISA, or indeed a pension. The blame for poor performance is therefore often attributed to the wrong place; it is the fault of the investment mix, and not the tax wrapper.
Whether you are a DIY investor, or have taken advice from an IFA, there really is no excuse for holding poor performing funds for long periods. All investments should be reviewed on a regular basis, we would suggest at least six monthly, with poor performers ruthlessly weeded out and replaced.
2. “Pensions are too expensive”
This ‘myth’ is actually partly true, some older pensions, taken out in the 1980’s and 1990’s can be hugely expensive. Although there are now many cheaper options available, if you still have a pension from this time you will be paying the older, often higher, charges.
But pensions taken out now can be incredibly cost effective. A DIY investor, if they are prepared to use a Tracker fund, that is a fund which moves in line with a chosen stock market, such as the FTSE 100, can pay as little as 0.27% a year in charges, that’s just £2.70 a year for every £1,000 invested!*
Pensions should only be looked at through the lens of charges, investment performance is equally important, but you should do everything possible to make sure you are getting value for money.
Cheap isn’t always good, value for money is.
3. “Pensions are too inflexible”
Again something which was probably true a few years ago and may still the case with some old pensions.
We’ve seen examples of pensions where the whole fund was lost if regular payments were stopped in the first five years, or where only the contributions were returned on death and not the full fund value.
No one would argue that such practices are right or fair, but on the other hand, pensions are now so much more flexible with fairer terms and conditions. Most contracts have no penalties for stopping and starting contributions, regular and lump sum payments allowed, huge investment flexibility is available if you use a SIPP (Self Invested Personal Pension) or a more sophisticated Personal Pension, and there is now no requirement to buy an Annuity,
Sure, you can’t have all your money out in one go and you have to wait until you are at least 55, to access the fund, but that’s the ‘bargain’ you make if you want take relief on your retirement savings. If you want to get at your money earlier, or as a lump sum, use an ISA (Individual Savings Account), you will still get tax efficient growth, you just won’t get the benefit of tax relief.
Simply put, pay you money, take your choice.
4. “I have to buy an Annuity”
This myth is simple to dismiss, you used to, you don’t now.
This is another example of how pensions have moved on. Years ago the only open available, when the time came to retire, was to buy an Annuity, not anymore.
The options are huge, although buying an Annuity, despite falling Annuity rates, is still a popular option for many, there are many alternatives, Income Drawdown (also known as Capped Drawdown), Flexible Drawdown , Enhanced Annuity, Investment Linked Annuity, Fixed Term Annuity, Phased Drawdown, and Purchased Life Annuities are all viable options.
The days of having to buy an Annuity are over; don’t let anyone tell you different!
5. “If I die I lose all the money”
What happens to your pension on your death depends on when you die, but one thing is for sure, you won’t lose all your money, unless you have bought an Annuity and made a choice not to build in protection for your dependants.
If you die before you take any money from your pension the situation is simple. The whole of the pension will be paid to the person you nominate with no tax taken from it. Simple.
If you die after taking money from the pension, either tax free lump sum or income, the situation is a bit more complex and depends on how you have decided to turn your pension into income, for example have you used an Annuity, Income Drawdown etc.
Let’s take the two most popular options.
If you have bought an Annuity, you will have made some choices at the start, for example whether you want a level Annuity or one linked to inflation. You will also have been asked whether you would like to include a guarantee period, a spouse’s pension or value protection, all of which will allow the income payments to continue after your death.
In the case of Income Drawdown your financial dependants, normally your spouse, has three choices:
- To continue receiving income from the Income Drawdown plan
- Buy an Annuity
- Take a lump sum
Any income will be subject to income tax, as it has been during your life, although any lump sum payment comes with a hefty 55% tax charge.
So, does your pension die with you? Categorically no, unless you have consciously chosen to build in no protection to your Annuity.
6. “I can’t afford to pay into a pension”
We all have competing calls on our money, nothing is getting any cheaper, wages are still rising slowly, and for many people who are not yet on the housing ladder saving for a deposit is often seen as more important.
But assuming you do want to retire at some point, and of course not everyone does, you will need an independent source of income, it therefore makes sense to start saving as soon as possible.
And whilst we think about it, no matter how much of a cliché it may be, it really is never too young to start saving for retirement, just look at the figures:
- A 25 year old saving £200 per month for their retirement, assuming a 5% return after charges, would have a pension pot of £182,193 at age 65.
- Start 10 years later and the fund would be worth £115,255, nearly £80,000 less! (Source: Investment Sense pension calculator )
If you are employed try and take advantage of a work place pension, this will be easier now Auto Enrolment has started, and over the course of the next few years your employer will have to pay into a pension for you, providing you commit some of your wages.
Many employers already offer a pension to which they contribute. If you are not a member of a work place pension, ask whether there is one available. When most people can’t afford to save enough for retirement missing out on employer pension contributions makes no sense at all.
Pension’s aren’t for everyone, some people will never like them and prefer to use other ways of building up capital for retirement. But don’t let some of the misinformed comments you hear about pensions put you off, find out the truth for yourself, and then make up your mind whether or not pensions are for you.
Our team of Independent Financial Advisers are experienced in helping people plan for their retirement, using pensions, as well as many other options. If you would like to discuss how best you can plan this area of your finances call one of our IFAs today on 0115 933 8433, alternatively enquire online or email email@example.com
*Charges based on buying the HSBC FTSE 100 Index R Fund through Best Invest