5 pension myths you need to avoid

Saving enough money for a comfortable future is hard enough, so there’s no sense making things more difficult than they need to be.

Yet too many of us do just that, thanks to misconceptions that foster bad habits and push our financial goals even further out of reach. It’s especially true when it comes to pension saving because missed opportunities, and what may seem small mistakes now, can add up to have a significant impact on the size of you pot and lifestyle in retirement.

Here are five common pension myths that risk derailing your financial future - unless you can avoid them.

1. ‘I don’t trust pensions - it’s not really my money’

Saving into a pension means sacrificing money now so that it’s there for the future but some seem to think that money held in a pension is somehow no longer theirs - preferring to keep their money where they can get at it.

This can be a big mistake because pensions are, mathematically speaking, often the most tax efficient place to save your money.

Pension money is still definitely yours even if you can’t access it straightaway. Current rules allow you to access your pension from age 55, rising to age 57 in 2028. The confusion comes, perhaps, because of scare stories about pensions being at risk of new taxes by the government. Pension contributions benefit from tax relief. A £1 contribution today costs you 80p if you’re a basic-rate taxpayer, as little as 60p if you’re a higher-rate taxpayer and 55p if you pay additional-rate tax. If paid into a SIPP - a self-invested personal pension - basic rate tax relief is added automatically while the rest can be claimed via self-assessment.

Once inside a pension your money can grow free of capital gains tax and then be withdrawn, with 25% of it available tax-free (up to a limit of £268,275) and the rest at your taxable rate of income. The biggest benefit comes if you contribute at one tax rate but withdraw at a lower one.

And yes - tax rules may change, and they could get less generous. However, it is very unlikely, based on previous changes, that any change would apply only to money already contributed.

2. ‘I’ll sort my other finances first’

We all have a long list of demands on our money. If it isn’t the rising cost of living, it’s meeting housing costs or paying for children. These can often leap-frog retirement saving in our priorities.

It’s understandable, but it might cost you in the long run. The earlier you invest the more opportunity there is to benefit from the stock market’s long-term growth potential. Of course, there are no guarantees, but starting earlier - rather than later - can make your money work harder over time.

By way of example, the chart below shows two people saving the same amount for the same number of years - but one starts earlier than the other. This example is just an illustration - in reality, investment values fall as well as rise rather than give a steady return. Charges would also apply and reduce any returns.

Petra starts investing £1,000 a year at 25 years old but stops paying in when she’s 55, while Jonathan invests the same each year from age 35 and stops at 65. By the time they both reach 65 Petra has significantly more. This is the power that investing sooner rather than later can have.

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. This information and our guidance tools are not a personal recommendation in respect of a particular investment. You should regularly reassess the suitability of your investments to ensure they continue to meet your attitude to risk and investment goals. Eligibility to invest in a SIPP and tax treatment depends on personal circumstances and all tax rules may change in the future. Withdrawals from a SIPP will not normally be possible until you reach age 55 (57 from 2028). It’s important to understand that pension transfers are a complex area and may not be suitable for everyone. Before going ahead with a pension transfer, we strongly recommend that you undertake a full comparison of the benefits, charges and features offered. To find out what else you should consider before transferring, please read our transfer factsheet. If you are in any doubt whether or not a pension transfer is suitable for your circumstances we strongly recommend that you seek advice from one of Fidelity’s advisers or an authorised financial adviser of your choice.