This article appears as part of the Money HQ with Ben Stark newsletter.
Pension myths can catch out even the most experienced savers.
As part of Pension Awareness Week, we break down seven of the most common misconceptions holding people back from maximising their retirement savings.
“I’ve already paid £60,000 into my pensions this tax year, so I can’t pay in any more”
You’re right that £60,000 is the maximum amount for most people when it comes to paying into their pension pots each tax year and claiming tax relief.
But it may be possible to contribute more, due to the “carry forward” rules. These allow you to roll over any annual allowance you did not use from the previous three tax years.
As an example, if you only contributed £10,000 in 2024-25, you could potentially add the remaining £50,000 to your nest egg this tax year. If you have a lump sum such as a work bonus or inheritance, this could be the perfect time to give your retirement pot a tax-efficient boost.
“I’m not working, so I can’t get pension tax relief”
If you’re not working at the moment, you might think you won’t qualify for tax relief, and therefore there’s no point contributing to a pension pot.
However, this is incorrect. Everyone is entitled to some pension tax relief, even children and non-working adults. Those with earnings of less than £3,600 can claim 20% relief on pension contributions they make, up to £2,880 each tax year.
This means if you contribute the maximum £2,880, it will be topped up to £3,600, thanks to the tax relief from the government.
Read more Money HQ:
- Can I pass on my pension when I die?
- How to reduce your Inheritance Tax bill
- The modern costs of a comfortable retirement
“I can only pay into my pension, not anyone else’s”
No, this is not true. You can pay money into anyone’s pension, including your spouse or partner’s, child or grandchild, or, well, anyone really.
Known as “third-party contributions”, these can be a useful financial planning tool, particularly if someone close to you hasn’t managed to build up much in the way of retirement savings themselves. For example, if your partner took a career break to raise children or care for elderly relatives, third-party contributions could help to boost their pension pot.
Parents and guardians can also set up a pension for a child to give them a head start in saving for their future. Others, such as grandparents, aunts and uncles, can contribute once the pension is open.
“Pensions are subject to inheritance tax”
It’s been well publicised that the government intends to make pensions liable for inheritance tax (IHT) – but it hasn’t happened yet.
Pensions will fall within the value of a person’s estate for inheritance tax purposes from 6 April 2027. Until that time, most pensions can be inherited by beneficiaries free of IHT.
“My state pension and auto-enrolment pension are enough for retirement, I don’t need to save anything else”
Sadly it’s unlikely that the state pension plus a workplace pension where you’ve been auto-enrolled and are saving the minimum will be enough to give you a comfortable retirement. Most people underestimate the amount of money they’ll need when they stop work.
The industry trade body Pensions UK calculates that a single person will need £13,400 a year to achieve a minimum living standard in retirement. This rises to £43,900 for a comfortable lifestyle. The minimum level covers basic living costs plus leisure activities and UK holidays. The comfortable level allows for more luxuries, like holidays abroad, and more restaurant meals and theatre trips.
Assuming you qualify for the full annual state pension, people will still need to build up a pension pot of £540,000 to £800,000 (for a single person) to achieve a comfortable retirement, according to Pensions UK.
“It’s too late to boost my pension now”
There is no doubt it’s best to start early when saving for retirement. As well as having longer to make pension contributions over your working life, you will benefit from the power of compound interest.
However, it’s also never too late to give your pension a boost and enjoy a bigger savings pot in later life. If you’re in your 40s, 50s or even 60s, you can increase your regular contributions, or pay in a one-off lump sum, and reap the rewards when you retire.
For example, paying in an extra £200 each month from age 50 until you retire at 65, could give you an extra £48,200 in your pension pot, assuming 4.5% annual investment growth.
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“I’ll pay the same rate of tax on my pension withdrawals as I do on my income at the moment”
This is another myth that needs dismantling. Pensions tax can be a tricky issue to get your head around, but the tax charged on your pension withdrawals has nothing to do with the income tax rate you paid when you were working.
Instead, your total income is added together each tax year (which, in retirement, could consist of your state pension, withdrawals from a personal pension, maybe some buy-to-let income, and so on), and any tax due is calculated accordingly.
You could find you move from paying 40% or 45% income tax on your salary when you were working, to paying 20% on your retirement income, because your income has fallen. You can usually take 25% of your pension pot tax-free, which can also help lower your tax bill.
Ben Stark is a chartered financial planner with over a decade of experience advising businesses and families. He is partnered with St. James's Place Wealth Management.
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