Pension Misconceptions
The first thoughts people have when discussing pensions are, ‘I can’t touch it until I’m 57’, ‘it reduces the amount I earn each month’, ‘I will receive my state pension so don’t need to pay into a pension’.
Whilst all of that is true, it’s important to understand the common misconceptions associated with pensions, and the benefits that come along with them:
‘I can’t touch the money until I’m older’ – that’s true, however, there is good reason for it. The majority of people who have access to money, one way or another, will spend it. By locking the money away, you will not be tempted to access it early, and your funds will be used as they are meant to be.
‘It reduces the amount I earn’ – You will receive less by contributing into a pension, yes, but depending on how the contributions are made, the government will top up your contributions. Also, if you are a higher or additional rate taxpayer, you will receive further tax relief, reducing the income tax you pay. Finally, for those who are employed, your employer will usually match your contributions into your pension up to a certain limit (usually % of earnings).
‘The state pension will be my pension’ – Currently the state pension provides an annual pension of around £11,400 per annum. Double this for those who live with partners and your monthly income will amount to £1,900. Whilst this sounds great, the average UK household spend £2,300 per month (assuming you no longer have a mortgage), leaving a shortfall of £534 per month. For those who haven’t saved, this could mean working into retirement or reassessing your lifestyle. For those who have, they can draw from their pensions or other assets to make up the shortfall, continuing to live the lifestyle they have become accustomed to.
Now there are plenty of caveats involved with saving towards retirement, however, if you get used to saving early and stay consistent, your future and eventual retirement could be a lot brighter.
ReferenceAverage UK Household Budget 2024 | NimbleFins