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      12-26-2012, 06:23 AM   #27
United Kingdom

Drives: M5
Join Date: Jan 2009
Location: North East

iTrader: (1)

A few myths surfacing here

Myth #1. "Retired couples need less money than working couples". Agreed there's usually no mortgage to pay, but generally speaking, inflation will have reduced the payments on a 30 year old mortgage to a smallish percentage of income. With more time for hobbies and travel I would propose that an active and happy retirement costs at least the same and most likely substantially more to finance than a 9-5 lifestyle.

Myth #2. "I won't need a BMW by the time I retire". Presumably this is generated by mental pictures of the grey haired set running around in Fiestas, Polos and Micras. If you like to drive a BMW today, there's absolutely no reason you won't want to after retirement, other than you can't afford one.....which is the point of this thread. Most people recognise that retirement calls for some downsizing......what I'm saying is that most people are sleepwalking into the level of downsizing that's going to be required based on recent developments and their impact on pensions

Myth #3. "The 50,000 annual limit doesn't affect me". In reality, any higher rate tax payer on a defined benefit pension who's reasonably close to retirement and who gets a reasonable pay rise of a few hundred pounds a month will find themselves with a massive and typically unexpected tax bill.

Myth #4. "I get tax relief on pension payments". Actually no you don't. What you get is tax deferrment by postponing receipt of a benefit. The government's reason for doing this was claimed to be to encourage saving for pension but in reality had to do with the difficulty in taxing defined benefit contributions. The tax on pensions is simply deferred to the time the benefit is taken, when theroretically, the recipient may be on a lower tax bracket.

Myth #5. "I get both state and a company pension, so I'm OK" These days, converting a pension pot into a annuity realizes about half to one third of the income it did a few years ago. With the abolishment of the 10% tax bracket, taxes have also risen. Private sector defined payment schemes are a LOT less generous than the old final benefit models and recent pension legislation has had a major (and quite possibly unintended) impact on final benefit schemes. Bottom line, what was more than adequate a few years ago is probably woefully inadequate today

Myth #6. "Only rich people need a financial advisor". Figuratively speaking, today's tax and pension code is like a financial mine field swept by machine gun fire. Large amounts of tax are collected from people who fail to use their long term tax shelters. Its difficult to generalize, but these days a high percentage of those paying higher rate tax would benefit from professional advice. The tax code was established by wealthy people who know how to use these shelters. These days, a properly set up pension can generate tens of thousands of tax free income as long as allowable tax blankets are used properly over many years. Crap interest rates and poorly managed funds made to look pretty by dressing them up as ISAs is not the answer.

Myth #7. "I used a pension calculator and the result looks fine".....most pension calculators give you an option to click boxes for i. Index linking, ii. Widow's benefit and iii. 25% tax free payout. Clicking boxes i. and ii. will almost halve the benefit but unless you've other protection against inflation and don't mind leaving your partner destitute, you should make sure these boxes are clicked in order to get a realistic estimate.