Stranger things about pensions

Maria Espadinha

Maria Espadinha

People have misconceptions about a lot of things, and pensions is no stranger to this.

Financial advisers who are active on Twitter, as I am, are going to find the most preposterous ideas about retirement benefits and savings policies.

One of the most common myths around pensions is that the benefits of future state pensioners are all in a vault safe somewhere just waiting for individuals to retire.

This is commonly brought up by members of campaign groups like Women Against State Pension Inequality and Backto60, who claim that changes to state pension age have left women born in the 1950s worse off.

Yes, there is a National Insurance Fund, which inclusively reached a surplus of £2.3bn in 2017/18, but no, this doesn’t mean that there is money to spare for paying increased state pension benefits.

This fund holds national insurance contributions paid by employees, employers and the self-employed, which are then used to pay social benefits such as the state pension.

Savers should think of it as a current account – the UK state pension isn’t funded, which means the money we pay in every month is needed to support people’s benefits. It also helps to fund the NHS.

State pension isn’t a pension scheme. It is a benefit the government awards taxpayers, and as such it can be changed from time to time to accommodate funding gaps.

The second myth lurking around in the pensions world is that the tapered annual allowance only affects those earning above £150,000 a year.

Concerns about the impact of this allowance, which was introduced in 2016, came to light recently with doctors and other members of the NHS Pension Scheme facing heavy tax bills.

The tapered gradually reduces the allowance for those on high incomes, meaning they are more likely to suffer an annual tax charge on contributions and a lifetime allowance tax charge on their benefits.

I’ve seen the reference to earnings made by respected pension experts, who should know that this allowance takes into account adjusted income, which is something different.

This is due to the fact that the tapered allowance considers projected pension contributions, which can push lower earners over the £150,000 threshold and land them with an unexpected tax bill.

To find out whether or not they are affected by the tapered allowance, individuals need to work out their threshold income by adding together gross income, for example salary or income from investments, and then deduct any pension contributions.

It is far too complicated for individuals to be calculating this on their own, but it won’t help if we perpetuate the idea that it applies to earnings and don’t explain the nitty gritty detail.

The third myth – and I was to blame for this one myself, as I only found out about this tweak recently – is related to auto-enrolment minimum contributions.