This article is more than 6 months old
It was correct at the time of publishing. Our views and any references to tax, investment and pension rules may have changed since then.
3 pension myths busted
In this two-part article series, we bust common pension myths and offer tips to help you manage your pension.
Important notes
This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.
It’s quite easy to let the nitty gritty details about pensions pass you by. And with so many rule changes over the years, it’s no wonder why there are so many misconceptions.
To help set the record straight, we bust some common myths about managing a pension.
This article isn’t personal advice. If you’re not sure what’s right for your circumstances, ask for financial advice. Remember, pension and tax rules can change, and benefits depend on your circumstances.
1. ‘My pension dies with me’
Thankfully this isn’t generally the case. Depending on the type of pension you have and what you’ve done with it, it’s possible that you can pass it onto your loved ones.
For defined contribution pensions, like the HL Self-Invested Personal Pension (SIPP), you can usually pass on any money that’s left in your pension to a nominated beneficiary, free from inheritance tax.
In fact, if you pass away under the age of 75, any withdrawals they make will usually be completely tax free. If you pass away over the age of 75, any withdrawals will be taxed at their marginal income tax rate.
How do I pass on my pension?
Pension savings aren’t usually covered in a will because they normally fall outside of a person’s estate. This means it’s normally up to you to tell your pension provider who you’d like to inherit these savings when you die.
This nomination isn’t legally binding, but must be considered by the pension scheme’s trustees. You can choose to nominate as many people as you like, or even charities, and decide what portion you’d like each of them to get. You can update your nominated beneficiaries at any time, should your circumstances or wishes change.
If you have an HL Self-Invested Personal Pension (SIPP) you can update your nominated beneficiaries through ‘account settings’ in your online account. You can also download a postal expression of wish (nomination) form if you’d prefer and return it in the post.
Passing on an annuity
If you’ve used your pension to buy a lifetime annuity, or you plan to, the income you receive will stop when you die, unless you’ve chosen particular options.
| Annuity type | Benefit to loved ones |
|---|---|
| Joint-life annuity | You choose how much of your annuity income will continue to be paid to your beneficiary if you pass away before them. |
| Guarantee periods | Your income is paid for your lifetime and is also guaranteed to pay for a minimum length of time. If you die within this time, the income will continue to be paid to your estate or your beneficiaries for the rest of the guarantee period. |
| Value protection | Your beneficiaries will receive the original amount you used to buy the annuity, less any income already paid, as a lump sum. |
2. ‘I don’t need to look at my pension until I retire’
If you don’t engage with your pension savings and investments, you might find you can’t afford to retire when you want to.
Most pensions that you get through work offer a default fund, which is a type of investment chosen for people who don’t want to make an active investment choice. Pension contributions are also often set to a minimum unless you specify otherwise.
This might suit you fine to begin with, but as your circumstances and priorities change, so might your affordability and attitude to risk.
You should also remember all investments, including default funds, can go down in value as well as up, so you could get back less than you invest. You also can’t normally access your pension until at least 55 (rising to 57 by 2028).
Default investments aren’t personal to you
Default funds will aim to grow your money through a range of investments during earlier years, usually weighted towards the stock market. However, this might not necessarily align with your goals and attitude to risk.
For example, in your younger years, you might decide you can afford more risk than your default investment allows. You might opt to put at least a portion of your pension into higher-risk investments. Generally, higher-risk investing can mean greater potential returns, and you’d have more time to make up potential losses or ride out periods of market volatility.
In your later years this could be a higher risk strategy, as you’d have less time to make up any shortfalls or recover from investment loss.
Even if you’re happy with the default investment option and its performance, you should still regularly review it to make sure it continues to meet your objectives and attitude to risk.
You can ask your pension company for a fund factsheet, where you’ll be able to see how it’s performed. Don't look at the funds or figures in isolation or focus solely on whether they’ve gone up or down in value though – even the best fund managers lose money sometimes and past performance isn’t a guide to the future.
It’s more useful to compare your funds against their benchmark and other funds within the sector. Ask yourself is the fund outperforming its peers, keeping pace with or lagging behind, and what are the future prospects and are they right for me?
If you’re not sure whether an investment is right for you, ask for financial advice.
3. ‘I’m stuck with the pension provider I’m given’
The average person has 11 jobs in their life. That could mean 11 different pensions, each with different rules, features and benefits. The investment choice and charges between pension providers can vary dramatically, so can the quality of customer service.
It’s important to know how many pensions you have, how they work (including your options at retirement) and what level of service you’re getting in exchange for the charges you’re paying. Some providers offer more than others when it comes to support and useful tools to help you manage your pension.
If you’re not happy with your current provider, you could consider transferring to a new pension plan like the HL SIPP (Self Invested Personal Pension). Before considering transferring, it’s useful to check for any loss of benefits or guarantees.
With the HL app, it’s also easier than ever to check your investment performance. Log in securely and make changes on the go.
Editor's choice: our weekly email
Sign up to receive the week’s top investment stories from Hargreaves Lansdown
Please correct the following errors before you continue:
Hargreaves Lansdown PLC group companies will usually send you further information by post and/or email about our products and services. If you would prefer not to receive this, please do let us know. We will not sell or trade your personal data.
What did you think of this article?
Important notes
This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.
Editor's choice – our weekly email
Sign up to receive the week's top investment stories from Hargreaves Lansdown. Including:
- Latest comment on economies and markets
- Expert investment research
- Financial planning tips
Related articles
Category:
Funds
HL Select turns 7 – what we’ve learned and what’s next
HL Select Fund Manager Steve Clayton looks back on seven years of the HL Select fund range, how it’s performed and what’s next.
01 Dec 2023 6 min read
Category:
Investing and saving
Investing in healthcare – where are the opportunities?
The healthcare sector is enormous, absorbing over 10% of the economic output of many developed nations. We take a closer look at the risks and opportunities to watch out for.
30 Nov 2023 5 min read
Category:
Investing and saving
How to invest, by the late, great Charlie Munger
With Charlie Munger’s sad passing, we look back and share some of his most important investment philosophies for investing in the stock market.
30 Nov 2023 4 min read
Category:
Investing and saving
Autumn statement – National Insurance tax change plus ways to help cut your tax bill
The headline grabbing National Insurance cut might look like good news, but the tax burden is still set to be the highest it’s been since the Second World War. Here’s what’s changed and what you can do to reduce your tax bill.
30 Nov 2023 4 min read