Personal Pensions – Explaining the myths
There has never been a better time to have a pension plan. If you still need convincing that saving into a tax advantaged personal pension is a great way to save for your retirement or ‘life after work’, Niall Sharry, a Chartered Financial Planner from Acumen Financial Planning explains some of the myths.
Myth No 1 – If I die young, my pension dies with me
This is absolutely not the case. With virtually all modern personal pensions, if you die before taking your pension, the entire fund is passed to whomever you choose. And if you die before age 75, the fund is paid tax free, whether paid out as a lump sum or as income via Drawdown. This is also true if you have already started to draw your pension and die before age 75. If you die after 75, and your beneficiary chooses to take the entire pension as a lump sum, a 45% tax charge applies. However, a better option in many cases would be to receive the lump sum as a pension fund, then any income drawn is only taxed at the beneficiary’s marginal rate.
Myth No 2 – pensions are risky
They really do not have to be. If you wish, you can benefit from all the tax advantages that pensions enjoy, but invest purely in a cash fund, which cannot fall in value. There is no rule saying you have to invest in the stockmarket, although bearing in mind their long-term nature, that is a good strategy in many cases.
Myth no 3 – pensions are expensive
The vast majority of personal pension plans available in UK today have typical annual management charges of 1% per annum or less. Competition has intensified in recent years and there has been pressure from government, which has resulted in reductions in charges. Do remember though that, just as with many other things in life, cheaper does not always mean better.
Myth no 4 – property is better
If you will excuse the pun, many regard investing in property as a one-way street. Rents go up and house prices rise even faster. Buying a flat as a buy-to-let can be a great investment, but there really are no guarantees. If you are unlucky enough to want to retire whilst property is in the doldrums it could knock plans off course. If property is appealing, then own it alongside a properly diversified and tax efficient pension – a strategy no more complicated than not putting all your eggs in one basket.
Myth no 5 – my business is my pension
To be fair, it might be – every business is different. That said, if you own a business, then tax deductible pension contributions paid by your company are a great idea. Adopting such a strategy will not only reduce your corporation tax liabilities, but will extract funds tax free from the business into a personal fund in your own name. As explained above, from the age of 55 you will be able to spend that fund as you see fit. Anything left once you die can be passed tax efficiently to whomever you choose.