6 common pension myths debunked

When it comes to pensions, misconceptions are common, and they can lead to missed opportunities or costly mistakes.

It’s important to stay informed about rule changes and understand the details of how pensions work, as errors can significantly reduce your retirement savings.

So, read on to discover six common pension myths and the facts that debunk them.

1. “Everyone receives the full State Pension”

A commonly held misconception is that everyone receives the full State Pension, but this just isn’t the case.

Indeed, FTAdviser reports that only around half of claimants receive the full State Pension, with the other half receiving a smaller portion based on their National Insurance contributions (NICs).

To qualify for the full new State Pension – £230.25 a week or £11,976 in 2025/26 – you need 35 qualifying years of NICs.

The minimum number of qualifying years needed to receive any State Pension is 10, which would provide £65.79 a week (2025/26).

If you are behind on your NICs, you can top up any gaps on HMRC’s website.

2. “You can inherit a pension tax-free”

Historically, pensions have fallen outside your estate for Inheritance Tax (IHT) purposes. However, from 2027, the rules are expected to change and could potentially bring pensions under the scope of IHT, though the exact details remain unclear.

Under the current rules, if you or your beneficiaries withdraw a lump sum, the money may become subject to the standard 40% rate of IHT or Income Tax at the beneficiary’s marginal rate, depending on how much was withdrawn.

How your pension is taxed also depends on the type of pension you have. For instance, if you have a

•  Defined contribution (DC) pension and die before 75, your beneficiaries can usually inherit the pension tax-free up to the Lump Sum and Death Benefit Allowance (LSDBA) of £1,073,100 (2025/26). If the pension remains in a flexi-access drawdown account for the beneficiary, they can withdraw funds whenever they want, tax-free, regardless of their age.
  This is why keeping the pension within the pension wrapper is important, as it maintains these tax advantages.

• DC pension and die after age 75, the pension can still be passed on via flexi-access drawdown, but any withdrawals will be taxed at the beneficiary’s marginal rate of Income Tax. Keeping it in a drawdown account still allows flexible access and tax-deferred growth.

• Defined benefit (DB) pension, the tax on the pension depends on the scheme.

• State Pension and you reached State Pension Age after April 2016, your spouse or civil partner may inherit part of it, depending on their financial situation. However, it would form part of their taxable income.

A financial planner can help you ensure your pension, or one you have inherited, is passed on efficiently and that the withdrawals are planned to limit the tax liability.

3. “Pension income isn’t taxed”

You can typically withdraw 25% of your pension pot as a tax-free lump sum, which doesn’t count towards your Personal Allowance. This portion is known as the Lump Sum Allowance (LSA).

For the 2025/26 tax year, the LSA has a limit of £268,275, unless you have transitional protection, in which case your LSA may be higher. Once you have used your full LSA, any additional lump sum withdrawals will be subject to Income Tax.

The State Pension is treated as taxable income, similar to a salary. However, because the State Pension is usually below the Personal Allowance – £12,570 in 2025/26 – any tax owed is generally collected from your other sources of income.

A financial planner can work with you to create a pension withdrawal plan that ensures you can meet your retirement goals while also limiting your exposure to Income Tax.

4. “Everyone’s Annual Allowance is the same”

The Annual Allowance is the amount you can contribute to your pension each year while still receiving full tax relief on your contributions.

For most people, the Annual Allowance is either £60,000 or 100% of your earnings, whichever figure is lower. You can also use the ‘carry forward’ rule, which allows you to backdate your Annual Allowance by up to three tax years, meaning you could contribute up to £220,000 in 2025/26 tax year.

However, if you are a high earner and have an adjusted income above £260,000 a year, your Annual Allowance tapers by £1 for every £2 above this threshold and can fall to as low as £10,000 a year.

Similarly, if you have already flexibly accessed your DC pension and continue to make contributions, you will trigger the Money Purchase Annual Allowance, which limits your annual contributions to £10,000.

Unlike individuals, businesses aren't restricted by earnings when contributing to pensions. So, if you run a business, it could be tax-efficient to make contributions through the company. This could potentially allow you to contribute more than you could personally, while also reducing your Corporation Tax bill.

A financial planner can help you explore how to make the most of your Annual Allowance and pension contributions.

5. “You can start drawing from your pension whenever you want”

While this isn’t technically a myth, as you may be able to access your pension early, doing so before reaching the Normal Minimum Pension Age (NMPA) – currently 55, rising to 57 in 2028 – usually comes with considerable tax consequences.

Unless you qualify under specific exceptions, such as serious ill health, accessing your pension before you reach the NMPA can trigger a tax charge of up to 55%, and your provider may even refuse to release the funds.

So, if you’re planning to retire before reaching the NMPA, it’s important to have alternative sources of income in place. A financial planner can help you explore the most suitable options to support an early retirement and ensure your overall plan stays on track.

6. “I’m too young to have a pension”

Many people underestimate the impact of early pension contributions, often assuming that smaller earnings in their younger years won’t make much difference. However, thanks to the power of compounding, starting to save early can significantly boost your retirement fund.

For example, a study cited by Insurance Edge shows that beginning pension contributions at age 25 rather than 35 could lead to a retirement pot of around £800,000 instead of £500,000. While the exact difference depends on your earnings and contribution levels, that £300,000 gap could translate to an additional £15,000 per year over a 20-year retirement.

In short, even smaller contributions made early on can grow substantially over time, making a big difference to your financial future.

Get in touch

As well as alerting you to any misconceptions you may have, a financial planner can also help you maximise your pension contributions and ensure your withdrawals are efficient. They’ll keep you informed of any rule changes and adjust your plan to ensure you stay on track for a secure retirement.

To speak to a financial planner, get in touch.

Email info@mlpwealth.co.uk or call us on 020 8296 1799.

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.

All information is correct at the time of writing and is subject to change in the future.

Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.

A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.