Five pension myths savers need to stop believing10 October 2016
Despite the best efforts of pension freedoms, pension simplification and other such initiatives, pensions remain anything but simple. There are national campaigns to improve the public’s perception and understanding of pensions, but all too often individuals are making retirement planning decisions based upon incorrect assumptions.
David Smith, Regional Director of Financial Planning at Tilney, highlights five of the most common misconceptions:
1 - My pension fund is mine
Although the saver is the beneficiary of their pension fund, it is typically owned by a professional trustee or trustees, until such point when the saver takes retirement benefits.
Whilst many may feel this contravenes their wishes, it can in fact be highly beneficial; a pension fund is therefore classed as being outside a deceased’s estate for Inheritance Tax (saving up to 40%). Ultimately, the Trust arrangement is designed to protect your savings, not keep them from you.
2 - Other investments are more tax efficient than a pension
Pensions are the most effective tax efficient savings vehicle in the UK.
- They can provide immediate Income Tax relief of 20%
- 20% additional Income Tax relief for higher taxpayers and 25% for additional rate taxpayers
- They grow completely free of Income Tax, dividend taxation and Capital Gains Tax
- Death benefits can be paid free of Inheritance Tax
- Upon retirement up to 25% of the fund value can be paid free of tax
- Income from pension funds can potentially be controlled and drawn in a tax efficient manner
- Payments made by an employer obtain relief against Corporation Tax
Obviously, there are limits to many of these allowances, but it is clear to see the merits of such a plan. There are alternative investment vehicles available that offer worthwhile tax breaks, but they tend to be inherently risky and subject to stringent qualifying criteria.
3 - I have to use my pension to provide an income in retirement
Perhaps the biggest downfall of pensions is that for most people, you cannot gain access to your pension fund until you have reached 55 years old. Understandable, considering it is a retirement savings vehicle.
Thanks to Pension Freedoms though, once you reach 55, there is more flexibility than ever in terms of accessing your pension savings. Gone are the days when you had to use your fund to provide an income subject to limits which may or may not have been sufficient for your needs. Today, you can take income / lump sums in any combination you see fit.
4 - I’ll be taxed 55% on my whole fund if I breach the Lifetime Allowance
Much ado has been made of the reduction to the Lifetime Allowance, that is, the maximum amount of pension savings that can be built up over a lifetime (currently £1m) before a tax charge becomes potentially due. Yes, the Lifetime Allowance has continually been reduced over recent years making it a threat to the wider public, especially those with Defined Benefit (Public sector etc.) pensions. And yes, the tax can reach up to a highly punitive 55%.
However, this tax is only due on the excess above the lifetime allowance limit – not the whole fund. Therefore, the concept of turning down an employer pension contribution for fear of this charge may be slightly over the top .
There are too, other things to consider. With good financial planning, you can control your exposure to a Lifetime Allowance charge through timely drawings from your pension fund.
5 - My pension dies with me
This is perhaps one of the most frequently asked questions, as many fear their lifetime savings will disappear in the event of their death. Whilst actual death benefits vary from plan to plan, if death occurs before the age of 75, typically the fund can be paid as a lump sum to any beneficiary / beneficiaries of your choice. Above all, it’s tax free.
If death occurs after age 75, it can still be paid to any beneficiary as a lump sum, but at the beneficiary’s marginal rate of Income Tax.
However, perhaps the biggest win of the Pension Freedoms legislation was the ability for beneficiaries to inherit the pension plan itself. They take ownership of the plan, it remains outside of their estate for Inheritance Tax purposes and can be drawn upon, as income or lump sums when they see fit.
There are indeed many more misconceptions regarding pensions but the fact remains that each of the above could severely damage an individual’s retirement plans if acted upon. If ever in doubt, get financial advice.
To discuss this or any other financial planning topic please contact David Smith on 0191 269 9970/ firstname.lastname@example.org
The value of investments, and any income derived from them, can go down as well as up and you may get back less than you originally invested. This press release does not constitute personal advice. Past performance is not a guide to future performance.
Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change. Please note we do not provide tax advice.
Tilney is a leading investment and financial planning firm that builds on a heritage of more than 150 years. The Tilney Group operates under the Tilney brand for Investment Management and Financial Planning and Bestinvest for execution-only investing. We look after more than £22 billion of assets on our clients’ behalf and pride ourselves on offering the very highest levels of professional client service with transparent, competitive pricing across our entire range of solutions.
We offer a range of services for clients whether they would like to have their investments managed by us, require the support of a highly qualified adviser, prefer to make their own investment decisions or want to take more than one approach. We also have a nationwide team of expert financial planners to help clients with all aspects of financial planning, including retirement planning.
We have won numerous awards including Best Fund Platform and Best SIPP Provider at the 2017 City of London Wealth Management Awards; Investment Award – Cautious category in the Private Asset Management Awards; and Stockbroker of the Year, Execution-only Stockbroker of the Year and Self-select ISA Provider of the Year 2015, as voted by readers of the Financial Times and Investors Chronicle. We are pleased that our greatest source of new business is personal referrals from existing clients.
Headquartered in Mayfair, London, Tilney Group employs over 1,000 staff across our network of offices, giving us full UK coverage, and we combine our award-winning research and expertise to provide a personalised service to clients whatever their investment needs.