160- Retirement Planning Misconceptions

We're all approaching retirement with too many misconceptions and confusions. 

In this episode Benjamin explains that retirement planning isn't as black and white as you may think it is. You don't have to retire when your State Pension kicks in. You don't have to necessarily buy an annuity. Your pension doesn't die with you. 

It's all here and served free from any financial jargon, as always. 

Lastly, here's the free retirement health check guide Benjamin mentioned in this episode. This should help you focus your own retirement plans. 

Join Benjamin Mitchell (themoneyscot), serial hater of financial jargon, as he helps make your finances clearer and ensures you never make another financial mistake.

Getting on top of your personal finances doesn't need to be complicated or scary. Arm yourself with the only knowledge you need to transform yourself from money novice to money nerd! 

Take my 5 minute retirement assessment (can you already afford to retire?) 🚀


Disclaimer - please note that nothing in this podcast can be relied upon as financial advice and the content is provided purely for information and guidance purposes. Please seek independent, regulated financial advice relevant to your situation.

Transcript

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SPEAKER_00 0:13

Good morning, good evening, good afternoon. Whenever you're listening to Heads Up on Money, thank you, and you are very welcome here, Money Nerds. My name is Benjamin Mitchell. This is Heads Up on Money, it's Personal Finance Friday, and we are continuing our recent misconceptions series. If you haven't already listened back, then the first episode we covered all of the misconceptions you may or may not have regarding pensions. We then turned to ISAs. Following that, we talked about the classic tax misconceptions people typically have and some of the misinformation that gives us the fear when it comes to taxes, but that doesn't need to be the case, so listen back to last week's episode if that sounds of interest. But today's episode, I'm covering retirement planning misconceptions. What are the myths that we all have regarding our retirement plans? It can be something as trivial as understanding that retirement doesn't necessarily equal pension. Pension is just one such vehicle you have at your disposal in your retirement. A pension is a freedom pot, not necessarily the kind of idea of a retirement pot. That's why many people are put off from retirement planning, because we don't like to think about our pensions and our future and retirement, and that's far down the line, so none of us actually engage with our planning typically at younger ages. But if you flip it on its head and think of this as your retirement pot, as your independence vehicle, as your way of achieving all of your financial life goals, it becomes a lot more appealing. So looking in this episode at the misconceptions surrounding retirement. So this is a big one that I see very commonly with people. We've talked about ISES, we've talked about pensions, we've talked about the tax out with pensions and ISAs, but today I'm bringing it all together to talk about something that most of us should be thinking about, and indeed will be thinking about at some point. For most of us, the non-money nerds out there sadly approach this too late, but you're not that money nerd, you're far more diligent and disciplined than that. So retirement, retirement planning, it sounds relatively straightforward. You work, you save into a pension throughout your working life, you reach retirement age, you stop working, and then your pension should pay you an income. And it's probable that the level of income you're going to get in retirement is probably going to be less than what you've become accustomed to in your working life. That should not be the case, money nerds. There's nothing to say with diligent planning, sound investment planning, sound tax planning, all of the things I talked about last week, optimizing your tax position, reducing the total taxes you pay. There's nothing to say you need to take a pay cut when you do step back from work. There is nothing to say you need to take a pay cut when you step back from work. It's really important. And I think that's why many of us are put off from retirement planning is because we know or we assume deep down there's going to be a drastic cut in our standards of living. But that is why Money Nergy, you listen to Heads Up and Money. This is why you do all the great stuff to ensure that isn't the case. So perhaps the biggest misconception I see of all when it comes to retirement planning and funding your retirement is that there is one correct way to fund your retirement. There simply is not. It's multifaceted, it's very bespoke to you, your goals, your tax position, your beneficiaries, what you want your wealth to do for you, and whether or not you want wealth to last for the next generation. It is completely unique, and it's one of the reasons I love my job, is because no two retirement journeys are the same. So there is no correct way for you to fund your retirement. For some people, purchasing an annuity may be the way they go down. Perhaps retirement planning of old, whereby you build up a pot of wealth and then an insurance provider pays you an income for the rest of your life. Maybe that's suitable for some. For most nowadays, they engage in flexible drawdown of their pension wealth, where the onus, as I've talked about before, is very much on you to ensure your pension lasts for the rest of your life and gives you as much from your pension pot as possible, squeezing every last bit out of that pension so that you can live life to its fullest. So today we're going to talk about some of the misconceptions, hopefully, give you a bit of a better understanding about what retirement planning is, where this fits in with financial planning, and just a quick reminder before we start, as always, it's just general information and heads up on money, it's not personal financial advice. Your own retirement options will depend on your own circumstances, your pension arrangements, blah blah blah, all those disclaimers, I have to say them. So speak to your financial advisor if you have one, or understand that this really is just a bit of guidance and giving you quite literally a heads up as to what to be thinking about. So, what's the pr most common misconception I see? I honestly think this one has come up so often is when it comes to the age at which you can access your pension wealth. So, as I said, pensions and retirement they don't always have to go hand in hand. Retirement can exist without a pension. Pension is just the thing we assume and we associate with retirement. And as I've said, in some ways that makes us disengage from pensions because we assume and associate it with old age and complexity and we don't want to engage in that area. Pensions are massively helpful whether or not they're for your retirement or not. So, with regards to the age at which you can access your pensions, broadly speaking, without going into all the minutia of how this varies depending upon when you were born and all that jazz, but you've got two ages to contend with. Keeping it simple, money nerds. You've got your state pension age, the age at which you will get your state pension from the government, which is based upon how many contributing years you have over your working life and whether or not you do have the full state pension or not. Aside from that, there's what's called your kind of minimum pension age, your nominated pension age of your pension schemes, which will typically be younger than state pension age. So that's a crucial one. And many people tend to assume their retirement date has to be their state pension age because that's the date I'm getting my state pension, so that's the date I'm going to retire. Now I appreciate for some people that may be not a choice but a necessity. They can only retire at that point when they've got some guaranteed income coming in to replicate their work. But, money nerds, if you are engaging in good financial planning, there is nothing to say you have to keep working until state pension age, and only when state pension age commences do you draw down upon your private pension wealth. You can access your private pension wealth younger than state pension age, and typically it's 10 years younger. So if your state pension age is let's say 67, it's probable 57 is when you'll be able to access your private pension age. Again, this is changing quite often, so I'm not going to go into the details of it, but just remember all your pensions don't necessarily have to come in at state pension age. You can bring in retirement before then. And as I've talked about fairly recently in the podcast around the retirement danger zone, in other words, that point when you may stop working and before your state pension comes in, you may draw down upon your private pension wealth, but you may also, and it is often good holistic tax planning to do so, may draw to power draw down upon other wealth you may have, such as ISA wealth, investment bonds, general accounts. All of this and looking at tax in a different way rather than just aggressively tax planning, but bringing everything together into one holistic tax rate you pay can be beneficial to your financial plan. And what I mean by that is things like drawing down pension wealth up to perhaps the higher rate threshold and not paying higher rate tax on your pension drawdown, but supplementing that with ISA drawdown. It's doing this and having flexibility in all of the wrappers you have within your financial plan that often leads to the best outcomes. But misconception, number one, your pensions can only be accessed when you reach state pension age. So that means that's when you've got to retire. Absolutely not. The biggest bugbear I would say I have in financial planning with clients is that they have a preconception about when they can retire. And that's often based upon what they've read, when they think state pension age, what their friends, dogs, budgie says down the pub, you should retire at this date. It's totally bespoke to you. Two people may have very different retirement journeys. One person may have a smaller pot but more manageable lifetime goals, less exorbitant lifestyle. Another person may have a sizable investment pot, but they're taking out ridiculous amounts of withdrawals every year. So their financial plans will be completely different. When or when they cannot afford to retire will be completely different. So I've said this before in the podcast. Stop focusing on arbitrary dates and apply as much science and evidence to your financial plan as you can. Understand when you can retire financially, when you can afford to go. Whether or not you want to, obviously, is down to you how much enjoyment you get from your career, whether you want to phase into retirement, that's all bespoke to you, and I'm not coming at this from the angle that everybody wants to retire as soon as possible. But the greatest travesty in financial planning is when you're working longer than you need to in a job that brings you no joy, that's detracting from your ability to meet your financial life goals in other ways, travel, support your children, partially retire, volunteer, whatever it might be, if you don't understand the affordability to do those things, it could be too little, too late before you do. So please, please, please apply science and logic to your financial plans rather than just what you've heard down the pub. So, misconception number two, everyone automatically gets the state pension. That is simply not the case. Everyone assumes I'm on track for the full state pension. I would really encourage you to engage with the government portal, download a state pension forecast, understand: are you on track? Are you off track? Are there any missing years of contributions you need to backfill in order to make sure you are on track? Again, this will entail regulated financial advice if you have a question regarding this. So I can't give you a steer sadly. But understand that not everyone is on track for the full state pension under the current rules. You usually need at least 10 qualifying years to receive any form of the state pension, and the amount, of course, depends upon your record. A full new state pension, as things stand today, require currently requires 35 years of contributions, so don't assume you're on for the maximum or you could be in for a nasty shock when you do get to state pension age. Continuing the state pension chat, misconception number three I see is that the state pension is tax free. The state pension is tax-free for most people who are perhaps only in receipt of their state pension. Now there's some current topical debates around this at the moment because the level of the guaranteed state pension is almost encroaching the basic rate threshold, whereby your personal allowance is almost fully being washed out by the state pension. So as a result, people who may have only been in receipt of the state pension and have never paid state pension income tax historically may now have to pay income tax in their state pension because the state pension is greater than the personal allowance, if that makes sense. Parking that to one side, for most people, perhaps who may be in receipt of a state pension and a private pension, your state pension is taxable. It's just the way in which the state pension is taxed is never at source. So what I mean by that is there's no tax deducted from your state pension directly, but instead HMRC will look at your private pension and your state pension, work out how much tax you're due holistically on the payer of them, what your marginal rate of tax is, see last week's episode for an explanation on what marginal rates of tax are, and they will then apply that to your private pension. So your state pension doesn't seem like it's being taxed, but when all is said and done and all comes out of the wash, it is being factored in to work out your respective tax position. So the state pension is not tax-free, it is taxable. Important one to understand. Next misconception. Retirement means buying an annuity with your pension pot. This is one of the biggest misconceptions I see. For many years, people had a very simplistic view of retirement. You build up your pension, you retire, you buy an annuity, annuity pays you an income for life. Now, an annuity is still an option, people still do buy annuities, annuities still can be beneficial and recommended and suitable for some people in their financial retirement plan. Typically, those individuals who can stomach no volatility in their investments whatsoever, they want a guaranteed income for the rest of their life, perhaps they have no loved ones with which they wish to pass on a private pot of pension. Changes to inheritance tax and pensions at the moment are driving some people to consider annuities. Prevailing interest rates in the economy will determine how attractive or unattractive an annuity is. So there's lots of lots of minutiae around whether or not an annuity is or isn't appealing for your retirement plan. But the crucial point I want to get across is you do not have to buy one. The introduction of pension freedoms a number of years ago fundamentally changed the way in which we retire. So pension freedoms, as it sounds, means that you can do with your pension as you wish once you reach the relevant pension age to draw down upon your pension wealth, which as I mentioned at the start of this episode is not the state pension age, it's younger. You can convert all of that pension pot to an annuity, or you can draw down upon that wealth in as tax-efficient and sound investment management way as you can, in order to make that pot last for life. So you've got flexibility, you've got choices, and those choices should be considered very carefully. It's very prudent to seek financial advice if you're at that junction in your life. But what I will say is don't assume, as the norm is that you build up a pension and the pension then has to be used to buy an annuity. The retirement planning landscape and what retirement looks like has changed drastically, and too many people review their retirement planning with this misconception. So buying an annuity is not the only way in which you can access retirement. Next misconception is you need to take your 25% tax-free cash as soon as you retire. And that again is driven by typical sentiment, stereotypes, or in the idea that most people reach retirement age, they'll take their lump sum, their tax-free cash, because why the hell wouldn't you? You get 25% tax-free, happy days. Some cases that can be beneficial. You know, I've seen clients use it to pay off a mortgage, to support children under the property ladder, to pay off other debts, to go on a once-in-a-lifetime holiday. But if you're just taking it for the sake of it, you don't need to. It can often be more prudent to bring in your tax-free cash throughout your retirement journey. That may be more tax-efficient for you over the long term. If you're thinking about this, if you've got a hundred grand pension pot and you take your 25% tax-free cash, so you take a bite out of the apple at that point, you've taken 25 grand, 75 grand goes to drawdown. Well, that drawdown pot hopefully will continue growing, but you don't have any more chunks in the apple left to bite. You've bitten it all. Whereas if you'd left your pot growing over time in the great companies of the world, in equities, not jumping out of the boat when there's inevitable short-term sneezes in markets and things I talk about every single week, that apple grows and grows and grows, and the bite in the future, that 25% bite, is of a larger apple, so the chunk you get tax-free is more appealing. So I'm not saying here, money nerds, you delay taking your tax-free cash. There can be benefits to taking it sooner, there can be wider tax planning considerations to take into effect, particularly around inheritance tax. And when you reach age 75, again, I've got episodes of the podcast on that very niche topic around planning at age 75. Listen to it if you need more info. But the key misconception I want to get across to you is you do not need to take your 25% tax recash as soon as you retire. You do not need to take that necessarily to facilitate drawdown. You can take partial chunks over your retirement journey, and that can, in some cases, make investment sense and tax planning sense. Misconception next up is once you retire, you stop the need to invest. And I've talked about this before. There's a lot of BS in investment management, financial planning around the fact that once you get to retirement, suddenly you need to change your investment strategy that has served you so well leading up to retirement. That's not the case. When you reach retirement and if you are going into retirement and drawing down your wealth at as early a stage as possible, whether that's retiring in the classic sense from work or doing more meaningful things with your time or gifting to your loved ones, the point when you draw down upon your wealth, hopefully you've got multi-decades of life ahead of you. That's multi-decades worth of the need to retain investing in the markets to ensure your pot ensures growth and offsets the terminator of wealth that is inflation and does all the wonderful stuff we've become accustomed to over the accumulation phase of your life, if we call it that. There's a common misconception that you get to retirement and you take your foot off the gas, and that is a misconception 101. Yes, there may be more hands-on planning needed doing around ensuring you've got enough cash to weather any short-term volatility in markets, ensuring that you've got perhaps a couple of years worth of withdrawals tucked away, accessible. But other than that, you do not need to reinvent the wheel here, Money Nerds. You do not need to fundamentally change your investment stance, and you really should give strong consideration to not selling to cash when you retire. Investment volatility is still your friend in retirement as it was pre-retirement. Misconception 101, once you retire, you do longer need to invest. Next misconception is that my pension dies with me. That's not necessarily the case. Pensions can be beneficial not only in your lifetime, but for passing on wealth tax efficiently to the next generations. They retain the tax-privileged environment of a pension, which means income tax, capital gains tax can be beneficial. There's slight nuances here around whether you die before or after 75, which I won't get into, and also the changes that are coming in in 2027 around your pensions and inheritance tax have inevitably meant that pensions are not as favorable as they once were. But the point to take home here, money nerds, is that when you die, your pension doesn't necessarily just vanish and the pot gets paid into a bank account of your loved ones. It can often be tax-sensible and good tax planning to retain the pension privileges that pass with you in a pension for the next generation. And you do this by ensuring your pension nominations are up to date with your pension provider. Again, not going to get into the weeds here, but it is a misconception. I once had a client say to me, Does my pension, so if I die, all that money disappears? They didn't even think the money went to their loved ones perhaps as a bank transfer. They actually thought the money was lost. So that is not the case. They can retain in the pension wrapper when they pass to the next generation. There's just some complexities around the tax pros and cons of doing that. But again, seek financial advice if you are in any doubt or listen back to other episodes of my podcast. And I've got some resources on my website as well if you want to check those out. So trying to keep this to under 20 minutes, money nerds, it's challenging because there's lots to talk about when it comes to retirement planning. But the key thing I really want you to take away is your retirement plan should be unique. What is affordable to you or not affordable to you is personal to you. Depends on what your goals are. Do not base your retirement plan on what your friends are doing, what the Joneses are doing. It will be completely unique to you. You can retire earlier than your state pension age. You do not have to wait to state pension age. You don't have to take your tax-free lump sum in one go and then buy an annuity with the remainder. Retirement is far more modern, far more fluid than it once was. You shouldn't necessarily take the heat off the gas when it comes to investing in retirement. You've still hopefully got multi-decades of investment growth ahead of you. The journey that has served you so well to get to that point of financial independence should and indeed will serve you well post-financial independence date. And again, pensions do not die with you. They can be passed on to your loved ones, often in a tax-sufficient way. Granted, not as tax-sufficient as it once was from an inheritance tax planning angle, but pensions really are still superb on the way in and on the way out when used in the right way. I'm going to wrap it up there, Money Nerds. This has been your retirement planning misconceptions. If you've enjoyed this episode, I'll leave you with a recommendation and I'll include a link in the show notes that if you haven't already, please do download my retirement planning checklist. It'll help you to understand what you're on track with and what you're missing. It only takes about five minutes to complete, you'll get bespoke results, and it'll alert you to whether or not you're investing appropriately, whether you're paying the right amount of taxes, whether your debt planning is on track or off track. I know a few people have already completed this, and the feedback I've had has been really superb, so I really appreciate that. Leave a link in the show notes. If you download that, you should hopefully get some value and it'll help direct you on what to focus on next when it comes to your retirement plans. Okay, let's wrap it up. I've been Benjamin Mitchell, you've been the Money Nerds. This has been episode 160 of Heads Up on Money. This has been retirement planning misconceptions. Have a great weekend, Money Nerds. I will see you next week. Goodbye and stay safe.