We understand here at Active that the world of personal finance can seem like a minefield – everyone seems to have an opinion, but how can you be sure who is right? Since Pension Freedom 2015 came into effect (read more here) we’ve noticed lots of new pension-related myths. So here we are to bust them!
Myth 1. I’ve now got the freedom to tap into the cash in my pension pot whenever I want.
The reality: Maybe. If you are under 55 then your pension cash is still tied up and you cannot access it. However, if you are over 55 then yes, new rules mean that if your pension is a “defined contribution” fund you are probably able to access up to 100% of the cash in your pension pot.
Myth 2. If I decide to take the cash out of my pension pot then I will get it tax free.
The reality: Unlikely. Unless you have a very small pension pot, or are on a very low income you are likely to be liable to pay tax on cash which you access from your pension pot. Generally the first 25% of your pot is indeed tax free, however after that you will most likely be liable to pay tax at your highest marginal rate.
Myth 3. My fund value is the amount I can expect to receive if I access my pension pot.
The reality: Probably not, at least in the short term. Apart from the fact that there may well be charges associated with your pension scheme when you decide to access your cash, it is also likely that the scheme administrators will be obliged to deduct emergency tax (at up to 45%) at source before paying out your scheme. You will then be able to apply for a refund to HMRC. And of course it is important to remember that this process can take time.
Myth 4. Money is tight and I need a new boiler, I’ll take money out of my pension pot to pay for it.
The reality: Avoid if possible. Once you’ve started to access your pension pot you may not be able to start contributing again, in fact with some providers you will be forced to move the whole lot to a suitable arrangement. In addition to this you may also cap the amount you are able to contribute into a pension from £40,000 to £10,000. Unless you are really in a bind, it is very possible that sourcing alternative methods of finance is a better option.
Myth 5. I’ve got a final salary pension, but it’s better to take the cash instead.
The reality: Very unlikely. In our view, it would really be very exceptional circumstances where cashing in a final salary pension is a good idea, if at all permitted. But having said that, of course, it very much depends on your personal situation.
Myth 6. Now that I can, the right plan when I retire is to cash in my pension pot. Annuities are no longer a good option.
The reality: This all depends on your own personal circumstances. When making recommendations to our clients on how to manage their finances at retirement we take into account their full financial status, their family circumstances, their health, their attitude to risk, their desires for retirement…the list goes on. For some, that may result in a recommendation to access the cash in their pension pot, for others an annuity may still be the right route. In fact with new pension freedoms, we think it is even more important than ever to take good advice and get a clear and thought-through plan.