If you fall for any of these myths or misconceptions it can affect the size of your future retirement pot.
For the vast majority of us who would like to take some steps now to ensure we can enjoy some level of comfort in retirement, retirement planning is a necessity.
However, there are a ton of myths and misconceptions surrounding retirement planning that can negatively affect how we approach our retirement planning.
What will happen to my money?
A big problem here is the confusion about what happens to that money when we transfer it to a pension fund.
A study by Hargreaves Lansdown found that only a third of retirement savers realize that their money is invested in the stock market, while another third actively believe it is not.
This blind spot is particularly acute for women – only one in four knew that money went into stocks and not cash.
In a way, that’s understandable.
After all, we are talking about retirement savings rather than investments. But that lack of commitment doesn’t help people plan retirement properly, or even keep track of how their retirement is performing.
Automatic tax relief
One of the benefits for high earners in terms of pension contributions is greater tax relief.
The relief is based on your marginal tax rate. So while taxpayers of the basic tax rate receive a reduction of 20%, taxpayers with a higher and additional tax rate receive a tax reduction of 40% and 45% respectively.
This can also make a huge difference in the final size of your pot. For a higher rate taxpayer, this means that for every £ 60 they deposit, the Treasury will effectively add an additional £ 40.
The problem is that these higher contributions are not necessarily automatic.
It all depends on the type of company pension you are saving into.
If the pension scheme has a “net wage” scheme, the contributions will be deducted from your salary before income tax is paid. Your system will then reclaim contributions at your highest tax rate so you don’t have to do anything.
It is worth noting that “net wage” arrangements have created real problems, as lower-income workers receive no tax breaks at all.
Other pensions are run on a ‘source of discharge’ basis.
With these, your employer deducts 80% of your contribution from your wages, the other 20% is then requested from the tax office by the pension fund.
This is fine for base rate taxpayers, but taxpayers with higher and additional rates will miss out on the relief they are entitled to. In these cases, they will need to fill out a self-assessment tax return in order to receive the correct amount of tax relief.
Some people are skeptical of the pension, arguing that the tax relief on contributions is undone by the fact that you are then taxed on your pension income.
However, this is not entirely true. On the one hand, you can draw 25% tax-free capital from your pension.
That can be a substantial amount of cash, depending on how well you’ve done giving away money over the course of your working life, and the tax officer won’t get a penny of it.
Also keep in mind that the tax you pay on your retirement income is based on your total income at that point in time and can therefore be very different from the tax break on your contributions.
For example, if you are a property tax payer, you will receive a 20% tax reduction on your contributions. If your retirement income is less than the personal tax allowance, you will not pay any income tax on it.
The same applies to those who have been taxpayers at a higher or additional tax rate during their working lives, but who may be property taxpayers – or even pay no income tax in retirement -.
I can catch up later
It can be very easy for younger people to postpone retirement. It’s just something to worry about in later life, isn’t it?
Anyway, I have to leave a deposit, pay off my student loan, etc.
You can make up for something later, but the reality is that it will cost you a lot more than simply starting your retirement early.
This money adds up over time. So the longer it has to work its magic, the better you will be in the end.
Nobody ever retires wishing they had saved less in their retirement, but there are very many people who get older and wish they had started saving sooner.
The state pension takes care of me
The state pension is a fantastic safety net for retirees, but let’s be clear, it won’t bring you much comfort in your twilight.
This year’s study of Investing Reviews that included how the state pension in each country compares to the typical early retirement income of local workers.
And the UK state pension is not looking good, accounting for 28.5% of that early retirement income, ahead of Mexico and South Africa. In contrast, in Italy, India, Turkey, Bulgaria and Luxembourg, the state pension provides more than 90% of this early retirement income.
Recent governments have not exactly hidden the fact that the cost of maintaining a state pension is enormous in the face of an aging population. Because of this, we have raised the state retirement age, and more will follow.
Ultimately, relying on the state pension is a risky game.