Wednesday 22 January 2020


11 pension myths with the potential to damage your wealth prospects

Understanding pensions will put your in a much better position to build your wealth

Cartoon of two paths for pension savers
Wrong way? Savvy savers with the right info will make more of their pensions Photo: HOWARD McWILLIAM

Making the wrong assumptions about pension saving can damage your wealth in retirement. Some of these myths suit the financial services industry and so are left uncorrected. Others have grown out of how yesterday's world worked rather than how tomorrow's is being formed. In this fast-changing area, we set out commonly held myths and explain why they're wrong.

1. Pension? Oh no, property is best

"Property is my pension" is a popular view. This may have been true but the world is changing.

First, consider the tax. Money invested in a pension attracts tax relief. And gains made are not taxed. Finally, a lump sum of 25pc of the pot can be taken free of tax.

Property investments, in contrast, are subject to a number of taxes - inheritance tax, capital gains tax (at up to 28pc on property profit when you sell and make more than £11,100 per year) and increasing amounts of income tax.

Yes, a primary residence is infinitely more tax-friendly but you would need to stomach considerable downsizing - at considerable cost - to fund a retirement.

On income tax, buy-to-let investors face George Osborne's new landlord tax by 2020. It will wipe out profits for many owners. The introduction of this tells you much about the way the political winds are blowing.

In contrast, politicians are falling over each other to suggest ways to improve pensions. They'll never totally stop unhelpful meddling but property investors can expect more.

One final point. British property is overvalued in terms of rents and when prices are compared with wages. A generation before enjoyed an unprecedented boom in values and most assume the same will happen again. The numbers suggest otherwise.

2. My pension dies with me

This quite often used to be the case, which is why the belief persists. If pension savings are used to buy a single annuity, as most people once did, the assets were gone immediately and the income died when they died, unless it was a joint annuity designed to carry on paying a spouse. The money could be passed on if it remained in a pension pot. And the rules have further improved.

In very broad terms, when someone dies under age 75, under the new regime the recipients of their unspent pension cash aren't taxed at all. Where someone dies over 75 - which is most of us - the recipients of the cash won't pay a 55pc pensions death tax. Instead they'll pay their own "marginal" (highest) rate of income tax on the pension cash they take as their inheritance. A son could carry on using his father's pension in the same way as his father had been doing.

This is all far better treatment than money outside a pension which is subject to inheritance tax rules.

3. Your will controls who will benefit from your pension on your death

It's actually a beneficiary nomination form that dictates who will benefit from your pension, although pensionscheme trustees will often revert to the will for guidance if no nomination is made.

4. The tax breaks on pensions always boost my pot

If you pay into a company pension, this is true. Your contributions, up to £40,000 a year, are paid into your pension before tax is paid. A higher-rate taxpayer gets 40pc tax relief, effectively a 66pc boost to the amount put in.

However, if you put money into a Sipp, the money is boosted automatically with 20pc basic-rate tax relief, but higher-rate taxpayers need to claim the other 20pc on their self-assessment form. This is paid as a refund or through a reduced tax bill. Either way, it's money that goes into your pocket rather than your pension.

5. Everyone can access their pension at age 55

You could be forgiven for assuming we all get access to our company and private pensions at 55. The Government has done very little to explain planned changes. The reality is that "private pension age" will be linked 10 years below state pension age, which is already proposed to increase to 67 by 2028 and to 68 by 2046 with this likely to happen far sooner. The full details are explained at

6. If I fall terminally ill before 55, I lose all my money

This isn't the case. Your pension can be passed on, as above, but if you have life expectancy of less than a year, you may be able to take your whole pension pot as a tax-free lump sum if you're under 75 (if you're over 75 you pay 45pc tax on the lump sum).

7. Professional sportsmen can access their money at age 35

Obviously, this myth would only affect the saving plans of a minority. It is true that sports professionals could once take their money early, depending on the type of sport - 35 for footballers but 40 for golfers and cricketers, for example. But it was realised that they usually found new careers and the perk was stopped in 2010. Welsh international Gareth Thomas, below, was among the last players to take advantage, drawing his pension from 2009 while he was still playing. Read more: Gareth Thomas: 'I earned £285,000 a year - and took my pension at 35'

Gareth Thomas was initially reluctant to see his life turned into a playGiving it a try: Gareth Thomas was initially reluctant to see his life turned into a play  Photo: Dan Wilton 2012

8. There's a lifetime allowance, a limit on savings, but it only affects the wealthy

This was perhaps once true, when the limit was £1.8m in 2011, but it has been successively reduced. In April it will be £1m.

It sounds high but consider this: a £1m pension pot becomes £750,000 after the tax-free lump sum is taken. Let's see how much secured income that buys. In today's market it would buy an index-linked annuity that would pay less than £25,000 a year. This is hardly a pension of the wealthy.

9. I can't put property in my pension

You can't put your own home or residential property in your pension. However, it is possible to use money in a Sipp to buy commercial property, such as a shop or offices. It's very tax-efficient but can be costly as a specialist, expensive variant of the Sipp wrapper is required. You can put in to commercial property funds, available through most fund shops and stockbrokers.

10. Sipps are for sophisticated investors only

It is true that picking your own investments in a self-invested plan can be complicated. But it is possible to keep it simple if you are a long-term investor and accept the stock market falls at times. Just open a Sipp and pick one low-cost globally invested fund. We offer ideas at

11. I can't choose investments for my company pension

This was previoulsy the case at most companies but more recently some firms will offer simply choices, often meaning you can choose to have more of your money go into emerging markets, for example, than the usual default.

Explained in one minute: how to boost your tax-free pension cash

'Lamborghini' pensions explained in one minute

Nine ways of improving your chances of retiring early

Work out how much income you may receive from your personal pensions with our handy retirement calculator. For more information about your retirement options or to request a free guide call 0800 345 7531.


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