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Challenging pensions
misconceptions (Part 1): Why bother yet – or at all?

Tim Box

Building on our recent look at some of the most frequently asked questions (FAQs) regarding pensions, in this blog we have looked at the most common misconceptions.

Challenging these misconceptions is vital if we are to promote engagement. In the first of a two-part blog, Tim Box, addresses the questions: why bother? And why think about it now?

  • I’ll get a state pension so I don’t need to worry

Future Pensioners need to ask themselves: could I survive on about £8,500 a year (at current state pension levels), and what sort of lifestyle will that give me? For many people, relying solely on the state pension will likely mean a very frugal retirement, and it will need to be topped up with other assets (such as a company or personal pension), if they are to keep near to the standard of living they had before retirement.

  • I don’t need to start thinking about saving until I’m 40

When it comes to saving for a pension, the sooner Future Pensioners can start the better. Clearly, that will give them longer to put more away. But there’s another critical reason.

The effect of compound interest means that every £1 paid in at age 20 is worth far more than each £1 paid in at 40. As the interest stacks up, the money works harder – and the difference could add up to tens of thousands of pounds in extra value over time, depending on how much has been invested and for how long!

It’s a pretty powerful incentive – but many 20, even 30, year olds will say they simply can’t afford to save for a pension yet. That’s understandable: there’s lots of competition for each pound in a person’s pocket, especially when they’re young. The point is that even small contributions early on will give a huge head-start and can make a real difference at retirement.

  • If my state pension ends up being means-tested I could be penalised for saving

State pensions are not currently means-tested which means that additional savings made into a company or personal pension won’t reduce the amount of state pension received. Someone with the full quota of National Insurance Contributions will be entitled to a full state pension. However, eligibility for a full state pension may mean that person won’t qualify for some other state benefits such as income support.

  • Pensions are just a rip off!

Many people worry that much of the money they put into their pension will be eaten away in management fees.  To address this, the Government recently introduced new rules meaning that, broadly, charges are capped at 0.75% a year on “default” arrangements within defined contribution schemes, but for other types of arrangement they can be a couple of percentage points higher.

However, charges shouldn’t, by themselves, be the determining factor in decision-making.  

The charges need to be put into context with the returns generated. Provided they offer better gross returns, funds with higher fees may in fact be better value than lower-charging funds whose returns are also lower. Therefore, simply investing in the lowest charging fund may not necessarily be the best strategy.

And if you’re lucky enough to be in a “final salary” or “defined benefit” pension scheme provided by your employer then, other than an agreed employee contribution, the employer normally meets all the costs of the scheme!

Look out for Part 2 of our common misconceptions series, where we’ll look at issues such as whether Future Pensioners can relax because employers have it all in hand with auto-enrolment and whether assets such as property and cryptocurrency are a viable alternative to investing via a mainstream pension fund.