Retirement Planning Myths – Fact or Fiction?

When it comes to retirement planning there’s a lot of information available, we take a look at what is fact and what is fiction.


Property is a better investment for retirement than a pension

When it comes to retirement planning it’s safe to say the British love bricks and mortar.  For some, the volatility of the investment markets means they would rather invest in property. And 1000’s of people have built up a very tidy nest egg for their retirement using buy-to-let properties, however, many of these portfolios were built up before draconian tax measures were introduced on second homes over the course of several budgets.

The introduction of the additional stamp duty of 3% has meant the cost of purchasing a buy-to-let has increased. If we compare that to pensions where you can receive tax relief on personal contributions. You can contribute the higher of £2,880 or your income up to the maximum annual allowance, currently £40,000. The tax relief you receive will depend on your marginal rate of tax but a minimum of 20%. The initial costs for investing in a pension are likely to be considerably lower than property.

Then we have to consider the implications of capital gains tax. Property is naturally illiquid, you can’t sell a bedroom or a few bricks, to release capital you’ll need to sell the whole property. If that property has grown in value you might have a liability for capital gains tax. After the first £12,300 of growth (20/21) the balanced is taxed at either 18% or 28% depending on your rate of income tax. Whereas a pension grows free of capital gains and income tax and at the time of writing the first 25% you withdraw is usually tax free.

Finally, any rental income will be taxed at the owners highest marginal rate and unlike a pension, you can’t adjust the income to suit your personal circumstances.

Fact or Fiction? There is no definitive answer for this, however, the taxation of residential properties means the growth needs to be greater than pensions to provide the same net returns. 


You must buy an annuity at retirement

For many people exchanging their pension pot for a guaranteed income for life is still the best course of action, however, nowadays people often retire more gradually and either work fewer hours or take a less stressful job. Which means they may need some flexibility around how they take an income.

Since 2011 the requirement to purchase an annuity by aged 75 has been abolished. More and more people are taking advantage of pension freedoms and choosing pension drawdown. This gives far more flexibility to take income, lump sums, even just your 25% tax-free cash.

Although it’s not without risk, taking more than a sustainable withdrawal level could mean you run out of money during your lifetime. It needs to be carefully manged and we would always recommend you consult an independent financial adviser and the money advice service

Fact or Fiction? – Since 2011 there has been no requirement to purchase an annuity FICTION

Person Losing Money

When I die I lose my pension.

Actually, this has never been the case. There have always been death benefits for your spouse when you die. The main exception to this is if you had purchased an annuity, in which case a decision would be made at the outset whether to include a provision for your spouse.

Prior to a change of the rules in 2015 the taxation of a pension passed to a beneficiary depended on whether or not the deceased had begun to take benefits, this is what is known as crystallisation. This changed in 2015, now if you die before the age of 75 the fund can be paid to a beneficiary as a lump sum or even remain as a drawdown pension and would be tax-free. After the age of 75 it can still be passed on to a beneficiary, but they would be taxed on any withdrawals/income at their highest marginal rate of income tax.

Fact or Fiction? – Under current rules a pension can be passed down through successive generations FICTION  


Pensions are risky investments

In most cases when I hear this statement it relates to something in the news, a mis-selling scandal or something like the well-publicised KeyData default. While it is important to understand than any investment into stock and bond markets carry an element of risk and there is the chance that you will get less back than you invested, these risks are not limited to pensions, stocks and shares ISAs and other investments can carry exactly the same amount of risk as pensions. There are some simple steps to limit the amount of risk and you’ll find full details here but simply put.

  • Don’t be greedy if the return sounds too good to be true it probably is
  • Deal with an Independent Financial Adviser who is bound by stringent code of conduct and ethics.
  • Be brave, don’t bail out at the first sign of trouble
  • Diversify your portfolio so you don’t have all your eggs in one basket.

Fact or Fiction? Investing in any stock or bond market carries an element of risk, but there is no reason a pension should carry anymore risk than any other type of stock market investment. FICTION.

The value of your investment (and any income from them) can go down as well as up and you may not get back the full amount invested. Past performance is not a reliable indicator of future performance. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor. The Financial Conduct Authority does not regulate Buy to Let Investments and tax advice.

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